Open Banking is daunting for consumers because it’s new and goes against many of our instincts not to share personal financial information. However, Open Banking allows lenders and financial institutions to make more accurate decisions when it comes to providing you with their products and services. Instead of relying on credit file information which can be up to a month out of date, lenders can view a few months of bank statements to verify your income and expenditure and make sure that any loan or credit repayments would be affordable. Open Banking is a government-led change and authorised providers are strictly regulated to keep your data safe.
For every application that a customer submits, the lender has to make a decision as to whether they believe the customer can afford the repayments. To help mitigate the risk that they may lend to someone who can’t afford the loan repayments, lenders conduct affordability and credit risk assessments to get an understanding of the customer’s financial circumstances.
Until recently, these checks usually involved a review of your credit file in the form of a hard or soft search, a self-assessed income and expenditure form and perhaps a payslip to support your income, among other checks. Now, with Open Banking, lenders can verify your key financial information and even approve applications which might have been otherwise declined, as they can see in real-time how you manage your money and whether you have the disposable income available for loan repayments.
Open Banking also allows for these checks to be done within seconds, as the technology is so advanced. This means you can still receive same day decisions for your applications, which is especially important for payday loans.
The advantages of Open Banking for consumers are quite similar to the reasons payday lenders use Open Banking: you will receive a lending decision based on a more accurate view of your finances and it will only take a few seconds. It can be easy to make mistakes when filling out application forms which is why Open Banking can sometimes mean you are approved for a loan, where otherwise you may have been declined. For example, if you accidentally entered your monthly income as £150 instead of £1500, a lender would likely decline your application as you would be unable to afford the loan repayments with your salary. However, by conducting an Open Banking check, the lender would see that your average monthly income is actually £1500 and potentially approve the application. Of course, there are more checks than just your income, but this example helps explain why Open Banking benefits consumers as well as lenders.
There is a difference between Open Banking providers for businesses and consumers because there is a difference in how the data is used. Businesses, like payday lenders, use an Open Banking provider to see your financial data as part of your application process. For consumers, Open Banking means you can look at all of your banking products and services in one go.
While the reason for viewing the data might be similar, the use of that data is different. Currently, Open Banking services for consumers in the UK aren’t quite at their potential, but they could one day be a way for people to compare energy services, switch bank accounts easily and generally save money on day-to-day bills and expenses. Open Banking helps to create competition between banking institutions which should overall benefit the consumer!
For most payday lenders, conducting an Open Banking check will likely depend on your specific application. Not all Open Banking providers work with every single bank, though, so if your bank isn’t on the list, you will probably be required to send bank statements instead. If your application is subject to this extra verification, it’s unlikely the lender will be able to proceed without it.
If you’re thinking of applying for payday loans direct lenders can be a good place to start, but only after you’ve compared lenders using a comparison site. While there is a cap on the amount payday lenders can charge for their loans, there can still be a difference in how much the loan might cost you. Plus, there are other things to consider when comparing payday loans.
Although payday lenders may use Open Banking as part of their assessment of your application, you should only apply if you really need the money, and you know you can afford the repayments. Of course, sometimes things don’t go to plan and the loan repayments might become unaffordable. If this becomes the case, contact your creditor before your repayment is due, where possible, so they can help you arrange an alternative plan or repayment date.
Ultimately, payday lenders don’t want to land you in a worse financial situation, and if that means helping you to arrange a new repayment plan if your repayments have become unaffordable, or simply using Open Banking to assess your application, your lender will be wanting to work with you to help with your circumstances.
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