Low-income households and those struggling with ever-rising living costs are turning to short-term lenders and payday loan providers to plug gaps in their income or cover essential expenses while they wait for their next paycheck.
The difficulty is that while regulators and consumer advisory bodies will always recommend applicants source credit through a bank or another recognised lending institution, formal credit channels may not always be accessible or provide the financial relief hoped for by those most in need. This opens the door of opportunity for predatory loan sharks to co-exist alongside regulated credit lenders, often leading to bigger problems for those most vulnerable.
The Cost-of-Living Crisis Impacts on Consumer Lending
The cost-of-living crisis is global, and as record-high interest rates drive the costs of borrowing higher, along with fuel, utilities and food, the effects are becoming more pronounced:
- Short-term loan providers are refusing larger proportions of applicants as they juggle defaults and higher rates of non-payment.
- Lender pricing is becoming less competitive, where regulatory caps on rates and charges mean banks and other providers cannot afford to approve new loans.
Regulators limit the fees and rates lenders can apply to short-term loans. The consequence of these caps remaining static, despite inflation and other circumstances, is deepening the divide where lenders are reducing activity.
The Guardian reports that the volume of borrowers defaulting on unsecured credit loans and credit cards rose in 2022, while the Bank of England Credit Conditions Survey shows unsecured credit availability fell by 40%.
In short, credit is in short supply, lenders are withdrawing products due to ongoing defaults, and the limits on charges are making it unaffordable to offer competitive lending to those who need it most.
How to Find Affordable, Accessible Credit
Brett van Aswegen, CEO of payday loan provider Wonga, tells us:
“One of the biggest challenges with interest-rate hikes is the increase people face in the cost of existing debt, putting pressure on affordability when applying for additional credit products.”
Consumers are advised to evaluate their borrowing options carefully and avoid taking on loans and short-term debt where interest charges and potential late-payment fees will make it difficult to repay.
Regulators have also been called on to reconsider whether caps on short-term lending should be revised to broaden access to credit products with a layer of consumer protection built in.
It seems unlikely this will happen in the immediate future. Still, one thing is for certain – formal credit channels are not necessarily an easy answer, and these competing challenges may make it harder to take out low-cost borrowing for some months to come.
Written by Sterling McCullough; a 35 Year old financial blogger and risk analyst from the United Kingdom.
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