High cost credit needs to end. So, what are we replacing it with?
by Laura Hillhouse, on March 4, 2020
It’s well known that high cost credit can have a detrimental effect on the finances and mental health of those who need to turn to it to make ends meet. Those who need to borrow and have a low income are more likely to be turned away from mainstream lenders when searching for credit. The loan processing time can also just be that bit too long for some people looking to borrow, especially when they find themselves in situations where they need access to funds right away. All of this means that many people turn to payday lenders or high interest credit cards to get by.
“3 million consumers use high-cost credit in the UK with many having low credit scores, low incomes and unable to access mainstream forms of credit.”
Alternatives to high-cost credit report, July 2019
There’s a fight against high cost credit at the moment and there’s momentum building up in the movement each day. Many of you will remember Michael Sheen starting to drive an initiative to end high cost lending in 2018 and since then, things have continued to move on in the affordable credit front. Organisations across the country are taking a stand against loan sharks and payday lenders. The reasoning behind doing this is so important but what we’re replacing high cost credit with is equally as important. We need to make sure we’re getting the new solutions right for the most vulnerable people around the country.
So, what are the alternatives to high cost credit? Many of them already exist and are now being evolved and expanded to cater to those who need access to affordable credit. We can’t forget that many people haven't been educated well enough at a young age on finances - this is why many people struggle to know what options are available to them.
Below are some of the organisations that are working to replace high cost credit in the financial services industry and are taking a stand against irresponsible lending.
We work with many credit unions and our technology is designed specifically for affordable credit providers so that organisations such as them can offer their services to more people that need it. With over 400 credit unions operating in the UK, there’s a huge opportunity for them to help the most vulnerable.
Credit unions have a capped interest rate on their loans which means they are a great alternative to a high cost lender. In Britain, credit unions can only charge up to 3% interest per month and offer interest charged on the reducing balance of loans. This is a great way to operate and serve those who need it in the best way possible, but this doesn’t come without its challenges. These low interest rates can sometimes affect high risk consumers as it may not enable credit unions to provide to them.
Though some do have an online presence, few have the capacity to process loans instantly. This means that credit unions are often limited in their ability to service a huge number of members. However, there is huge opportunity for credit unions to grow and innovate in this space and serve those who need it.
Community Development Finance Institution (CDFI)
CDFI’s are key in the affordable credit movement. Especially since they’ve been established for social purposes and are usually rooted in their local communities. They’re known for lending to small businesses to help improve local employment and also offering consumer loans to address the need for affordable credit by those on low incomes.
The good thing for many is that CDFI’s serve a large segment of society which mainstream lenders avoid lending to. Overall, they tend to lend to the riskiest borrowers. They do their best to keep their interest rates fair and are much lower than high cost lenders.
There are currently around 50 CDFI’s in the UK of which 9 are offering personal loans. To serve more vulnerable people this number has to grow but to do so CDFI’s need to prove themselves as sustainable for investment as they largely rely on funding. This is a huge challenge for them, but adoption of technology could help with this as automating a lot of their process is going to save them time and money along with the added advantage of helping more consumers - being online means consumers don’t need to visit a branch. This in turn would make them more sustainable and more attractive for investment.
Both credit unions and CDFI’s are doing what they can to end high cost lending and offer credit at a fairer rate. We just need to make sure more people know that these options are available to them. There are also FinTech’s, like us, who are helping them along with. It’s important that we grow together to help those who need access to affordable credit and tackle irresponsible lending head on.
To talk to us about what Soar is doing to make access to affordable credit easier, get in touch.
*Facts and figures from The FCA, Alternatives to High-Cost Credit Report (July 2019)