Digital bank Monzo considers offering high-cost loans
Latest move by Monzo is first public exploration of payday loans by major challengers
Digital challenger bank Monzo has revealed it’s considering offering high-cost loans to consumers who struggle to get credit, it’s reported today.
CEO Tom Blomfield told The Telegraph that there have been conversations with the board about the possibility of offering loans to people with a poor credit score.
The feature has not been developed yet, but Blomfield believes that the service can be profitable and “do well” by customers at the same time.
Monzo’s rivals currently provide other types of loan. Revolut has been offering peer-to-peer loans since March 2017 and is now applying for a European banking licence, which would allow it to bring loans in-house, while Starling Bank launched its first personal loan product in August.
See Finder’s review of Monzo vs Revolut vs Starling Bank.
Consumers with a poor credit score can find it impossible to access mainstream loans and typically end up using payday loan companies to borrow at extremely high interest rates. For example, if you borrow £200 for one month, several payday lenders will have you repay almost £250.
It’s estimated that about 3 million people use payday loans, also known as “high-cost, short term credit”. This type of loan is intended to cover emergencies, not long-term or regular costs.
In October, the chancellor, Philip Hammond, unveiled a government plan to offer an alternative through an interest-free loan scheme.
Monzo is gradually entering the loans business. The digital bank currently offers arranged overdrafts to its customers and has just started testing loans with a few hundreds of them.
Customers that have been selected for the test receive a message in the app and can borrow between £200 and £1000, to be paid back in 3, 6, 9 or 12 months.
Monzo says it is committed to supporting people who are having trouble repaying loans, allowing them to “take a break” from the payments and to come up with a “reasonable repayment plan”.