LONDON (Reuters) – When a payroll problem left Natalie Gallagher so cash-strapped this month that she couldn’t afford her bus ticket to work, she turned to her regular lender Amigo for an emergency complementary loan.
But she was out of luck. 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 the coronavirus.
“They approved my top-up, but 10 minutes later I got a message saying my reason for the 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 customers three-month mortgage payment holidays and reduced overdrafts, less support has been offered to so-called subprime borrowers who often need extra cash just to stay afloat. .
Some lenders have closed their doors to new clients while others have been unable to extend cash reserves to borrowers since foreclosure restrictions prohibited weekly visits by home loan officers to their homes. .
According to the Money Advice Service, around 17 million people in Britain have less than 100 pounds ($ 122) in savings to draw from in a crisis and those working in some of the sectors worst affected by the pandemic are particularly vulnerable .
More than 6 million workers in the retail, travel, hospitality and beauty industries are 25% more likely than people in other industries not to have the money to fall back on, the 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 the FairMoney loan comparison site. “The consumer credit market is at a standstill.”
Gallagher, 29, of Manchester, northern England, said while debts to payday lenders such as Wonga damaged her credit rating, she was surprised to be dismissed this month .
“I would understand if I wanted a new loan or if I had missed payments, but I never missed a payment,” said Gallagher, who works with delinquents.
A spokesperson for Amigo said Gallagher’s request was turned down because the purpose of the loan was not covered in his current loan criteria, which have been tightened since the pandemic.
“An Amigo loan is for thoughtful purchases, rather than daily expenses; that’s why the minimum loan we offer is 1,000 pounds ($ 1,225). “
FEW OPTIONS
While some low-income borrowers just struggle to budget, others have been blacklisted by the traditional financial system and rely on alternative credit providers such as the guarantor or home lenders to make ends meet. .
Credit score provider ClearScore, which shows consumers what offers are available based on their circumstances, said subprime borrowers could on average 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, senior borrowers on average found 1.79 loans available, while those of middle and non-senior borrowers found on average 0.81 product.
Britain’s largest 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 retailers. delivery drivers.
The subprime credit market had already contracted in recent years after tighter regulations and interest rate caps pushed large numbers of payday lenders out of business.
Without financial safety nets and affordable access to credit, millions of hardened Britons sought government social benefits, with 2.5 million applications for universal credit benefits between March 16 and May 5.
Nearly 11 million people have missed or expect to miss a bill that could lead to execution by bailiff and even eviction, according to a study by the Citizens Advice Bureau.
Debt charities say the lack of government programs to help Britons in debt at a time when subprime lenders are pulling out of the market has been keenly felt.
“High-cost short-term credit may seem like a short-term financial stopgap, but all too often it can become an expensive repeat trap,” said Sue Anderson of the debt 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 distressed borrowers – a policy proposed by former finance minister Philip Hammond in 2018 – have yet to materialize.
A spokesperson for the Treasury said it remains committed to working with stakeholders to pilot a program to support the most vulnerable and sustainable over the long term.
Lenders are prohibited from selling credit to anyone who thinks they cannot repay it, which will likely exclude many people who have lost their jobs so far in the pandemic.
This means that those employed in hard-hit industries, or those who have seen their household income decline while on leave, find an increasingly narrow range of options among sub-prime lenders.
“I imagine that 35% of the population are now in that non-prime or subprime position and there is more to come,” said Gewolb of FairMoney. “All they can do is find a surety or have a chat with a guy down the boozer who has friends with baseball bats and doesn’t have a consumer credit license.”
SUBPRIME CUT
England’s illegal money lending team, which is investigating and prosecuting loan sharks, said it was launching a live chat on the website on May 26 to give victims another safe way to seek advice and support .
“These nasty individuals mean nothing but misery for 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 a person targeted by predatory lenders to engage with authorities, suggesting that any spike in activity loan sharks may not be visible until 2023.
Analysts say it’s no surprise that subprime lenders are acting with caution. Even under favorable market conditions, companies that serve subprime clients typically absorb higher defaults than banks that focus on higher quality borrowers.
In 2019, 13.6% of loans made by Provident’s subprime credit card company Vanquis deteriorated, while the depreciation rate on 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 scores and focuses on mortgages, the rate was only 0.21%.
With little consensus on the outlook for the UK economy, few mainstream lenders say they are ready to help borrowers who weren’t up to the task before the pandemic.
David Duffy, managing director of Virgin Money, said the bank prioritizes existing customers and has not considered changing its lending criteria to offer credit to subprime borrowers.
A spokesperson for the UK Finance trade banking organization said: “Lenders are working hard to ensure the right balance is struck between helping clients budget effectively and meeting their payment needs. while lending responsibly and ensuring long-term accessibility. ”
Others have been more direct about a subprime laundering.
“It’s almost certain that people won’t be able to get credit,” said a senior bank official. “Clearly if you are in this category you are in a much more difficult scenario.”
(1 USD = 0.8156 pounds)
