How Instant Loans Became a Part of Our Lives

Online loan application

The demand for instant results is seeping into every corner of our lives. What’s more, our expectation of ‘instant’ has become faster too.

But banking is notoriously slow to adapt. It wasn’t until 1999 that the Co-operative Bank launched Smile, the first fully online banking service – that’s 15 years after the first Internet shopper made a purchase!

If you’re a generation X, you’ll probably recall making an appointment to ask for a loan at some point. Banks insisted on meeting  eye to eye so that staff could interrogate you about your financial position, and touch and photocopy your physical documentation.

As we crossed over into the 21st century, the very idea of instant loans seemed like a not so instant dream.

Instant loans

Errol Damelin

With a lack of momentum from the banks, it fell to Internet entrepreneur Errol Damelin to break new ground.

In 2006, Damelin came up with an idea for a modern, customer-centric approach to lending.

His goal would be to provide customers with transparency, exact control of amount and payment date, immediate access to funds, and no faxing or emailing documents.

After a year of software development, Damelin launched in beta version, where customers could apply for short-term loans up to £400.

From the outset Wonga customers were able to complete their loan application entirely online, select the exact amount they wanted in £1 increments and choose their own repayment term from 1 to 35 days.

However, there was still one piece of the jigsaw missing. Although Wonga’s risk assessment technology enabled them to make real-time lending decisions, it still required the co-operation of banks to get funds to customer’s bank accounts, which at the time was a not so immediate 3 working days.

Faster Payments

In 2008, Damelin’s goal to provide immediate access to funds was finally realised when Faster Payments (Britain’s first new payment service in 20 years) launched, making it possible for payments to be processed almost instantly.

UK Payday industry growth and expansion

Damelin’s model for fast, fuss-free loans was successful, turning Wonga into the UK’s largest payday loans provider.

The UK payday market continued to grow rapidly, reaching a peak in 2013, where 1.6 million customers took out 10 million loans with a value of £2.5 billion. Approximately 400 payday loan firms were reported to be in operation at the time.

The explosion in lender numbers, gave rise to another group of tech savvy firms — online loan brokers such as Instant Lolly. Their technology provides prospective borrowers with another layer of convenience — enabling them to access numerous payday lenders through a single application form.

Hold on cowboy, there’s a new sheriff in town!

The Financial Conduct Authority (FCA) took over responsibility for consumer credit in April 2014. One of the measures that the FCA introduced was a price cap on high-cost short-term credit, which includes payday loans and short term loans.

‘Industry shift’

The FCA’s measures inevitably led to some payday lenders shutting up shop. Other companies were forced to make significant changes to their business models to ensure they remained viable.

The majority of lenders operating today, have moved from offering payday loans to short-term loans.

Short-term loans are similar to payday loans but can be repaid over a longer period — up to 12 months. Borrowers pay a set number of monthly instalments instead of a single lump sum, so they are more affordable than payday loans, especially when larger sums of money are borrowed.

Ironically, Wonga was last to the pass with their 3 month ‘Flexi Loan’, which was only introduced in 2016.

A final word

Whenever a product or service provides more convenience, there’s usually a price to pay. In the case of Damelin’s instant loans, it’s higher interest rates, so they should only be used when absolutely necessary. However,  if you do find yourself in need of cash in a hurry, it’s another option to consider.

As of 31st August 2018, Wonga entered Administration.