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Is Alternative Lending Just Debt in Disguise?

Revolut’s new ‘Payday’ service will allow those banking with Revolut who are also employees of cooperating businesses to access up to 50% of their salary as they earn it, which may mean more financial freedom, but not necessarily a better financial future.

A middle aged woman sits on the floor of her living room with her back against a cabinet. She holds her hand to her mouth as she looks worriedly to her tablet that she holds with her other hand.

For many, the idea of a high-interest credit card or personal loan is daunting, and approached with the same caution as you’d have approaching a rabid animal. However, the FinTech industry continues to advance and offer more ways for consumers to access credit and live in a way that suits them, all with the touch of a button.

Wage Advances

There’s a lot of dispute around the ‘perfect’ payday - whether that’s weekly, fortnightly, or monthly - and what is most beneficial to the recipients. For those living ‘from paycheque to paycheque,’ the idea of a wage advance might be music to their ears, as this will allow them access to a portion, or all, of their salary for their upcoming payday.

However, the option to be able to access funds early is reminiscent of a loan, and despite it technically belonging to those that choose to use these services - it feels an awful lot like borrowing ‘from the future,’ that in turn, might cause financial problems going forward.

The marketing of these services makes them sound safe and secure, and the fact that the money already belongs to the service user positions it's worlds away from taking out debt or promoting financial irresponsibility. However, some of the problems that might appear once a wage advance, or multiple wage advances have been used, haven’t been highlighted, including:

  • The implications that might arise upon leaving or losing a job. Final salaries will be lower, and if someone doesn’t have an immediate job lined up, this could have huge financial circumstances.

  • Becoming stuck in a cycle of accessing money early - when a larger emergency happens, this might become a problem for future finances and lead to both wage advancing and debt.

‘Buy Now, Pay Later’

Similarly to wage advances, BNPL schemes utilise marketing and advertising to entice consumers, with 60% of Brits regarding money owed to BNPL as different from ‘real debt.’

We’ve spoken a lot about the danger of BNPL schemes in the past and whilst they do have a place and a purpose for some consumers, the way in which these services are promoted is dangerous and clearly marketed to a younger audience with less experience of finances and how to handle them.

Harjit Moore, CEO of Freeze Debt, discussed the impact that BNPL services could have on not only the finances but the mental health of those using them:

“Our research shows that although these Buy Now, Pay Later services look attractive and seem like a good idea at the time, they are having a huge impact on the nation’s mental health by irresponsibly facilitating unsustainable spending habits. We’re seeing this particularly amongst the younger Gen-Z and Millennial generations, with younger spenders spiralling into more debt as a result. We, unfortunately, saw an impact on consumer debt during the pandemic, for instance, in July 2020 - the final month that furlough remained free for employers - organic download of the Freeze Debt app increased by a staggering 364%.
As someone that’s experienced financial hardship myself, I understand how easy it is to let your finances spiral out of control. Buy Now, Pay Later are, however unintentionally, encouraging irresponsible spending, which is leading to many younger people experiencing financial difficulty.”

Credit Scoring

Of course, another grey area of these alternative ways of borrowing is the effects that they may have on your credit score.

According to Which?, using ‘BNPL schemes such as Laybuy, Clearpay or Klarna can damage your credit score if you miss a payment and fail to repay what you have borrowed.’ In addition to this, these failures to repay (known as ‘defaulting’) can be noted on your credit score for up to six years.

Wage advances, as something that might lead to future debt problems, could also be a contributor to potential negative effects on a credit score. Again, the marketing of these services often doesn’t highlight the implications that they might cause for your credit score and financial future going forward.

It’s great that there are a number of alternative lending methods that have become more available, however, the sheer amount of alternative lenders making waves in the FinTech and personal finance industry can be overwhelming, and worst of all, could leave many financially worse off than when they started.

Harjit commented further on the how alternative lending has monopolised the FinTech industry:

“We’ve come into the FinTech industry at a time when it’s become monopolised by alternative lenders and businesses who are exploring new ways to lend. This has taken the focus away from the need of the consumer, and instead remained concerned with bigger and better ways to make money. Just because businesses can do something, doesn’t mean they should, as some of the alternative lending methods becoming more and more popular can be hugely detrimental to those using them.”

As a debt advice company, the biggest piece of general advice we can give isn’t to avoid lending - we know that’s unrealistic - or create a severe budget that prevents you from living your life, but rather, to do your research. If you do find yourself in a position where you have to borrow money, make sure you’re aware of the terms and conditions, and remember that there are services like ours that can help you in times of financial hardship.


About Freeze Debt

Freeze Debt is the first debt advice and solutions app helping UK users to take their first steps towards a debt-free future. Our free service provides those struggling with unmanageable debt a confidential space to speak openly about their debt and financial worries and find a suitable solution based on their personal circumstances.

Freeze Debt's in-app messaging service is a revolutionary and modern way for users to address their debts and find solutions in less than 5 minutes, compared to the traditional and uncomfortable ‘call-centre-model’ that can take an average of 45 minutes.

So far, we’ve helped clear over £30m of debt and helped many people begin their journey to a debt-free future.


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