Insight: Time to step up and embrace inclusive lending

Sarah Touzani,
10 Aug 2021

As the final pandemic restrictions lift in England, for many it may feel as though normality has been restored. For others though, the impact of the pandemic on their finances continues to weigh heavy.

Amid the second coronavirus wave, the number of redundancies in the UK rose to 370,000, according to the Office for National Statistics, the most since records began in 1992. Whether the result of job loss, reduced work, or furlough, many continue to struggle with unstable household finances and low financial resilience.

The financial services industry has a role to play in supporting these financially vulnerable individuals – whether that is through guidance and support, or creating products that are more accessible, affordable and transparent – particularly in the lending space.

The hidden cost of high-cost credit

In the aftermath of a financial crisis, it seems only natural that people should seek out support to restore a sense of financial stability.

At Creditspring, we know this to be true. Our Stability Hub – a free tool that provides members with actionable tips to improve their credit score and overall financial resilience – has seen an 82% increase in members since the start of Covid-19. With around 2,000 still signing up to Stability Hub each month, it’s clear that people are continuing to seek financial support even as restrictions lift.

Equally, it should come as no surprise that an uncertain financial climate is accompanied by soaring levels of debt and reliance on credit, as people try to make ends meet.

Across the board, levels of debt have risen dramatically over the past year, with research from UK debt support charity, Stepchange, finding that between March 2020 and January 2021, 10.6 million people in the UK had to borrow money to make ends meet. Of this number, 26% used high-cost credit options, including buy-now-pay-later schemes and overdrafts.

This reliance on high-cost credit might be attributed to the low financial resilience of an ever-growing number of people, rising from 10.7 million to 14.2 million between March and October 2020.

Unable to withstand the financial shock of the pandemic, these individuals have commonly turned to high-cost credit – often a more accessible option than mainstream credit providers, but one that comes with a risk of spiralling into debt.

Proof of this is that two in five people who borrow using high-cost credit are now experiencing problem debt, Step Change reported.

Not long ago, the Financial Conduct Authority (FCA) expressed concern about the lending practices used by firms that offer high-cost credit. Several of these firms use marketing messages that emphasise the benefits of taking more credit to push vulnerable borrowers into further cycles of debt.

As it stands today, it is the vulnerable who are most at risk of falling into the high-cost credit trap. This might be due to having little in the way of borrowing history and therefore struggling to access mainstream credit options, which may be the case for young people who haven’t borrowed money at all or even older individuals who haven’t borrowed in a considerable amount of time.

There is a need to create solutions for these overlooked borrowers, many of whom have been hit hard by the pandemic and need an affordable, safe way to access credit without running into significant debt.

Prioritising financial wellbeing over profit

In this uncertain climate, it’s time for lenders to take responsibility and build business models that prioritise the financial wellness of their customers over profit.

Subscription finance is one such model, which runs counter to unregulated lending and unauthorised overdrafts by offering transparency to near-prime borrowers, with fixed monthly costs.

This model ensures that customers know upfront the cost of credit they receive, and do not have to contend with hidden charges or confusing APRs – reducing the risk of running into a debt spiral.

With unaffordable lending representing the most-complained-about issue to the Financial Ombudsman Service (FOS) in 2020, it’s clear that there is a need for a budget-friendly and unambiguous alternative to more unscrupulous lenders’ products, riddled with hidden costs.

The pandemic has shone a light on the impact that a financial shock can have on those that are less financially resilient. It is the job of lenders to step up and support these people, and to provide solutions that empower consumers to build their financial health and stability.

A new era

It is essential that lending models are as inclusive as possible, catering to the between 12 million and 15 million ‘near prime’ borrowers in the UK, whose thin or inconsistent credit files mean that they struggle to access traditional credit.

It’s up to lenders to support the most financially vulnerable customers and enable them to access credit in a responsible and regulated way.

For example, by using Open Banking to assess the eligibility and verify income of potential borrowers to ensure that lending is responsible and affordable.

Customers from all walks of life should be able to know upfront the cost of the credit they receive, receiving personalised help when it comes to repayment planning and budgeting. What’s more, customers are entitled to know whether they can afford the loan in question, with limits in place on further borrowing.

It is my hope that by embracing inclusive lending models, the fintech lending community can facilitate the financial recovery of vulnerable individuals that have been adversely impacted by the pandemic, helping them on the path toward achieving financial independence and resilience.

Sarah Touzani is COO at Creditspring