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BoE: UK consumer lending declines more than anticipated, paving way for alternative lending

Mar 06, 2013 Sean Albert

The U.K. economy has been in a gradual downward trend in recent months, and January reported worse numbers than expected, according to statistics released by the Bank of England.

Net lending declined £2.4 billion in the fourth quarter of 2012, as the Funding for Lending Scheme (FLS) continues to post disappointing gains.

"It is pretty clear that the FLS is not living up to expectations," said Michael Saunders, chief western Europe economist at Citigroup, according to Bloomberg. "While mortgage lending spreads have fallen, lending is weak and credit availability for business is poor."

The FLS initiative was enacted to boost small business and consumer lending, but so far only mortgages have improved from the scheme.

Consumers should lean on alternative credit
The Bank of England isn't ready to give up on the FLS program, however. In a recent statement, the agency insisted that credit conditions are improving, "but it will take time for this to feed through to lending volumes, given the typical lags involved."

But for many U.K. residents, time is not something they can afford.

As a result, more people are turning to alternative credit methods, and the results have been overwhelmingly positive.

"People see value in having a credit card," Peter Crook, chief executive of Provident Financial, recently told Yorkshire Post. "They need one to buy a ticket on a low cost airline or buy something from Amazon."

From prepaid cards to short term loans, alternative credit has a plethora of advantages that have been invaluable for underbanked and underserved citizens, including:

- Flexible loan amounts: Unlike bank and credit union loans - which generally only grant loans for things like car, college and auto payments - alternative short term lenders approve funds of all different sizes. For example, alternative credit can come in handy if a resident is struggling to pay all of his or her bills on time.

- Easier scoring methods: One misconception about people with subprime credit is that they are irresponsible spenders. But many members of this category - such as recent graduates - simply haven't been able to build up their credit scores. Alternative lenders, which are increasingly using things like Payment Reporting Builds Credit scoring measures, open up an avenue for many borrowers in the subprime category.

- Instant access: Some forms of alternative credit like prepaid cards are far easier to obtain than traditional lending methods, and can be used immediately.

Alternative lending will never replace banks and credit unions, but they offer a tremendous complement for underserved citizens in need of fast and accessible short-term loans.