Future of the credit market

The UK’s credit market is undergoing radical change. As banks become more stringent about who they will lend to, people with poor or no credit ratings are being forced turning to new avenues for affordable loans to get them through life’s events. But how is this new wave of smaller regulated companies changing the way consumers access credit? And exactly who are consumers turning to when they are refused by the mainstream banks?

The last few years have been among the most challenging for consumers trying to access credit, and being able to secure a personal loan or credit card has become significantly more difficult. An uncertain economy, stricter lending guidelines and the fear of a repeat of the 2008 financial crash has made some banks more risk averse and many consumers – even those with no history of financial difficulty – are increasingly finding themselves frozen out of the market and unable to access credit.

The latest Bank of England figures show that outstanding personal debt stalled at the end of 2016, rising at its smallest rate since May 2015. Coupled with this, the Financial Conduct Authority recently announced plans to put high-cost credit providers under the spotlight, meaning there is much more pressure to meet compliance regulations. All these factors are gathering at the same time to create a perfect storm in the mainstream banking sector, increasing the chances that banks will reject applications for credit, regardless of a person’s history or financial stability. This means that “low risk” consumers are struggling to secure credit just as much as those with poor credit ratings. Particularly for consumers who have gone through sudden life changing experiences, like the temporary loss of work, a cut in hours, divorce, or unexpected pregnancy, which has left them in short-term financial difficulty, it is becoming almost impossible to break through the wall of rejection.

Increasingly a temporary setback, which most consumers overcome by taking out a short-term loan, is becoming an undeletable black mark on a person’s financial record and the traditional banking sector is developing a habit of ignoring this large, and growing, market sector. There are now estimated to be more than two million people who are being underserved by mainstream lenders and it is likely this situation has reached the point of no return, with banks unlikely to ever service these consumers again.

Despite these developments, the demand for credit isn’t going anywhere – personal loans, credit cards and mortgages will always be top of the financial products consumers need – and it is more a question of how flexible the market becomes to accommodate these consumers.

The reluctance of larger banks to offer loans to consumers has resulted in a new wave of smaller regulated companies which are helping people live their lives. These businesses are overlooking smaller past mistakes, focussing instead on an individual’s current situation and future ability to handle affordable credit. Backed by guarantors, consumers who have been let down by the current system are now able to access credit through smaller companies who are disrupting the current lending model.

For many people looking to borrow, these companies have become a saving-grace, offering the kind of credit consumers need to cover short-term requirements, without the added pressure of paying amounts back quickly or face sky-high interest. Just think about the apprentice builder, in need of £3,000 of capital to buy tools for work, who has been rejected by the mainstream banks because of a single financial issue on their credit history.

In the past, this type of consumer would only have had unregulated money lenders to turn to – further risking their financial stability. Now there is another option, and these consumers have a place to turn to. For the foreseeable future, this changed landscape will service the forgotten consumers and in time will become the new norm.

One of the fastest growing consumer groups unable to access credit is younger people. For this group, the traditional lending market has become particularly problematic with so much weight placed on credit scores as an indicator of whether a consumer can handle taking on credit and more importantly, pay it back. These younger people, entering the market for the first time, are extremely unlikely to have a credit score. This is making it significantly more difficult for them to access credit in the current climate. Without a history of credit management to refer to, mainstream banks are less inclined to offer credit to younger people, effectively denying them the opportunity they need to build a credit history in the first place. Being unable to access smaller credit options, like personal loans and credit cards, means that when younger people need access to larger amounts of credit – like a mortgage – banks will look on them less favourably.

With the housing market unable to meet demand, cutting off access to finance is making the chances of owning a home essentially impossible for an entire generation. Ultimately, it is likely this change in the UK’s credit market will benefit consumers.

With more competition among smaller more innovate businesses consumers will have more choices of where they turn, adding to the likelihood of better deals.

Guy Mackenzie, Director of Buddy Loans