LONDON (Reuters) – When a payroll issue left Natalie Gallagher so strapped for cash this month that she couldn’t afford her bus fare to work, she turned to her lender usual Amigo for an additional emergency loan.
But she was unlucky. Like many lenders on which thousands of high-risk borrowers in Britain depend, Amigo had tightened its criteria for distributing money in the wake of coronavirus.
“They approved my top-up, but 10 minutes later I got a text message saying the reason for my top-up was not what they were doing right now,” she said. “Amigo was my only real option.”
While traditional banks have been forced to give their customers mortgage payment holidays and reduced three-month overdrafts, less support has been offered to so-called subprime borrowers who often need extra cash just to stay afloat. flow.
Some lenders have closed their doors to new customers while others have been unable to extend cash lifelines to borrowers since lockdown restrictions banned weekly visits by home loan officers at their home.
According to the Money Advice Service, around 17 million people in Britain have less than £100 in savings to draw on in a crisis and those working in some of the sectors worst hit by the pandemic are particularly vulnerable.
More than 6 million workers in the retail, travel, hospitality and beauty sectors are 25% more likely than people in other industries to have no money to fall back on, said the Center for Social Justice think tank last month.
“At the end of the day, these people have nowhere to go,” said Roger Gewolb, founder of loan comparison site FairMoney. “The consumer credit market is at a standstill.
Gallagher, 29, from Manchester in the north of England, said while past debts with payday lenders such as Wonga had hurt her credit rating, she was surprised to be rejected this month .
“I would understand if I wanted a new loan or if I had missed payments, but I’ve never missed a payment,” said Gallagher, who works with offenders.
An Amigo spokesman said Gallagher’s request was denied because the purpose of the loan was not covered by his current loan criteria, which have been tightened since the pandemic.
“An Amigo loan is for thoughtful purchases, rather than day-to-day expenses; that’s why the minimum loan we offer is 1,000 pounds ($1,225).
FEW OPTIONS
While some low-income borrowers struggle to stick to their budget, others have been blacklisted by the traditional financial system and rely on alternative credit providers such as guarantors or home lenders to join the two. ends.
Credit score provider ClearScore, which shows consumers what deals are available based on their circumstances, said subprime borrowers on average could only access 0.17% of loans in a market snapshot on May 16. . On January 1, the average was 1.
As of the same date in May, prime borrowers found an average of 1.79 loans available, while those in the middle, or non-preferred borrowers, found an average of 0.81 products.
Britain’s biggest subprime lender, Provident Financial Group, has tightened its underwriting criteria while rival Non-Standard Finance now only lends to key workers such as doctors, nurses, supermarket staff and workers. delivery drivers.
The subprime credit market had already shrunk in recent years after tighter regulation and interest rate caps pushed a slew of payday lenders out of business.
Without financial safety nets and affordable access to credit, millions of hard-core Britons sought government social benefits, with 2.5 million claiming Universal Credit benefits between March 16 and May 5.
Nearly 11 million people have missed or expect to miss a bill that could result in execution by a bailiff and even deportation, according to research by the Citizens Advice Bureau.
Debt charities say the lack of government programs to help indebted Britons at a time when subprime lenders are pulling out of the market has been keenly felt.
“High-cost, short-term credit may appear to offer a short-term financial palliative, but too often it can become an expensive repeat trap,” said Sue Anderson of the charity StepChange.
“This is unlikely to represent a lasting solution to people’s financial pressures, when a well-designed interest-free loan program could potentially make a useful contribution,” she said.
Plans to offer interest-free loans to some struggling borrowers – a policy proposed by former finance minister Philip Hammond in 2018 – have yet to materialise.
A Treasury spokesperson said it remained committed to working with stakeholders to pilot a longer-term sustainable support program for the most vulnerable.
Lenders are prohibited from selling credit to anyone they think cannot repay it, which is likely to exclude many people who have lost their jobs so far in the pandemic.
This means that people employed in hard-hit industries, or those who have seen their household income decline while furloughed, find a diminishing range of options among subprime lenders.
“I imagine 35% of the population is now in that non-prime or subprime position and there are more to come,” FairMoney’s Gewolb said. “All they can do is find a guarantor or have a chat with some guy at the bar who has friends with baseball bats and no consumer credit license.”
CLOSING OF SUBPRIMES
England’s Illegal Money Lending Team, which investigates and prosecutes loan sharks, said it was launching a live chat on its website on May 26 to give victims another safe way to seek advice and support.
“These nasty individuals mean nothing but misery to those who borrow money from them,” said team leader Tony Quigley.
Based on data from 2018 and 2019, the organization said it took an average of 2.75 years for someone targeted by predatory lenders to engage with authorities, suggesting that any spike in activity loan shark may not be visible until 2023.
Analysts say it’s no surprise that subprime lenders are proceeding with caution. Even in favorable market conditions, firms serving subprime customers generally absorb more defaults than banks that focus on higher quality borrowers.
In 2019, 13.6% of loans made by Provident’s subprime credit card company, Vanquis, went bad, while the so-called write-down rate for its home loans was 39%.
But for loans from the Royal Bank of Scotland, for example, which tends to lend to people with better credit ratings and focuses on mortgages, the rate was just 0.21%.
With little consensus on the outlook for the UK economy, few mainstream lenders say they are ready to help borrowers who fell short before the pandemic.
David Duffy, chief executive of Virgin Money, said the bank prioritized existing customers and had not considered changing its lending criteria to offer credit to subprime borrowers.
A spokesperson for banking trade body UK Finance, said: “Lenders are working hard to ensure the right balance is between helping customers budget effectively and meeting their payment needs while lending responsibly. and ensuring long-term accessibility.”
Others were more direct about a subprime laundering.
“People almost certainly won’t be able to get credit,” said a senior banking executive. “Obviously if you’re in that category then you’re in a much tougher scenario.”
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