The first independent research to analyse the impact of the regulation and price cap on the high-cost short term credit market has been published.  The study by the Social Market Foundation (SMF), commissioned by the Consumer Finance Association (CFA), shows consumers are now paying less to borrow.  According to the report, high-cost short-term credit plays an important role in helping people to cope with unexpected changes in income, or unplanned expenses. The research identifies changes in the market since the introduction of regulations, including tighter affordability checks by lenders in 2014 and a cap on the total costs of credit in 2015.  Since, the introduction of these changes, the volume of lending has reduced by 42% and the costs of borrowing have fallen.  Today a consumer borrowing £200 for 30 days would pay an average of £36 less than in 2013.  Industry data also shows that 92% of loans do not incur any additional fees or charges.

Information from CFA members shows that only 8% of loan applications are approved and over half of customers say loans are harder to access. Consumers who were not able to access a loan said they would have to go without essentials like, food, petrol or heating, (27%) or would have borrowed from friends and family (37%).  Around one in ten cited using other forms of credit such as overdrafts, credit cards and alternative credit.

Among consumers who purchased products during or after 2015, 90% agreed their short-term loan was a ‘convenient way of borrowing’ compared to 77% before 2015.

Nigel Keohane, Research Director of the SMF, said “The market has evolved significantly since the introduction of regulations in 2014 and 2015. Our research suggests that the number of loans has dropped dramatically, daily interest rates have fallen and the proportion of consumers facing charges has dropped.Alongside these improvements, policy makers should be vigilant about the potential risks to those who are excluded from the market.  Effective regulation of affordability checks will also continue to be important, as will ensuring that over time the cap does not dampen competition.”

According to a separate YouGov survey commissioned by the CFA, the typical customer today is likely to earn between £20,000 and £25,000, is male (52%), aged between 25 and 39, and is in full-time employment. 

 Russell Hamblin-Boone, Chief Executive of the Consumer Finance Association said: “This seminal report proves the combined effect of new regulations and the price cap has achieved the objectives of reducing costs and protecting consumers.  Non-standard finance makes a difference for many people who either cannot use, or choose not to use, mainstream credit services.  This report shows that, when it comes to getting access to credit, many people are not undeserved, but under-served. We are witnessing a modern credit revolution, which has led to high industry standards and better outcomes for consumers.  We must, together with the regulators, continue to monitor the market carefully to ensure consumers are appropriately protected, while also opening the credit market to as many consumers as possible and encouraging innovation. 

The research: A Modern credit revolution: An analysis of the short term credit market, commissioned by the CFA, uses industry data from its members and a new online YouGov survey of 1,200 consumers.  It highlights the real experiences of consumers, the current state of the high-cost short term credit market, and how it has adapted to the Financial Conduct Authority regulations.