New research by the University of Salford and commissioned by Fair4All Finance shows that the cost of living crisis may reduce access to affordable credit and that loans are becoming harder for customers to get.

Over half of the community finance lenders interviewed by the University of Salford reported an increase in the number of declined loan applications – including those from existing clients – as peoples financial circumstances deteriorate.

The research indicates that many customers are caught in a combination of rising living costs and longer term financial precarity with many not recovering from the financial impact of Covid-19 which pushed them into financial difficulty.

It also points to a change in the type of borrowing that customers are applying for, with many lenders reporting lower than average loan amounts as people cut down or postpone large purchases and home improvements. People appear to be applying for smaller loans to cover living costs.

‘Less of the, more, maybe aspirational purchases or aspirational loan applications. It’s sort of shifted more towards [the] sort of lower value emergency loan, the 500 pound, £1000 which then drags that the average loan size down as well.’
(credit union interviewee)

The rise of buy now pay later lending was also reported to be problematic as many borrowers were unaware of the cumulative impact of multiple payments.

Here are the headline findings of the report:

1. Cost of living crisis is reducing access to affordable credit, as lenders decline more loan applications
2. Harder to assess loans, as applicant’s circumstances and behaviour more fluid and unpredictable
3. Nature of demand and lending changing with shift to smaller loans to cover living costs
4. Savings growth falling or lower than projected, as members withdraw more savings and deposit less
5. Mixed picture on portfolio quality, though mostly pointing to deterioration in quality
6. Pressures on cost and income may be existential threat for some lenders and manageable for others

We covered these points in more detail in our Community finance and cost of living webinar which you can watch here.

What does this mean for lenders?

This research highlighted that lenders are facing significant cost pressures, including supplier and utility bills, but also in recruitment and retaining staff. There was also a large amount of uncertainty about how the cost of living crisis will develop and how this will impact customers.

How are we responding to the cost of living crisis?

This is a challenging time for both customers and the sector. In response, Fair4All Finance are working on several initiatives to help with the cost of living challenges faced by customers and the sector:

1. We are in the early stages of a large scale awareness raising campaign with the aim of generating more interest and higher quality applications to credit unions and CDFIs
2. With over £15b in unclaimed benefits each year and 8m households missing out on entitlements, we are looking at the impact benefit calculators and grant checkers can make. We’ll be testing inserting benefit calculators into different places in the customer journey including with lenders, credit reference agencies and price comparison websites. Evidence from Inbest and ScotCash shows up to £450 is missing from household entitlements each month, which could provide sustained help for many people
   
   You can help by featuring this on your website. Interested? Let Senthan know at Senthan@fair4allfinance.org.uk and we’ll be able to tailor support to your organisation
3. We’re continuing to progress our No Interest Loan Scheme with lending from the full pilot beginning this month. Early indications from the proof of concept suggest that by offering a way to spread essential or emergency costs NILS loans are providing a vital financial cushion for people unable to access or afford existing forms of credit, but who can afford to repay small sums. We think there’s room for more provision, and we’re looking for providers to get involved
   
   We’ve had lots of interest in our NILS pilot since the publicity recently on Moneybox and other channels. There is scope for us to extend the pilot and if you’re interested in delivering NILS as a pilot partner please get in touch with Kate at Kate@fair4allfinance.org.uk
4. Consolidation Loans: We are creating a £3.5m Partial Bad Debt Guarantee Fund to support the continued testing of consolidation loans. We’re designing the fund in a way that it can be scaled further, through continued reinvestment of profits. We think this is a crucial tool to support the scaling of affordable credit and to maintain lending capacity in the sector at a challenging time. We estimate that this scheme could help up to 9000 people and remove £21m in interest charges.
   
   We’re looking for organisations to get involved and will be launching an expression of interest form shortly. If you have any questions please let Vince know at vince@fair4allfinance.org.uk

The cost of living pressures on people in vulnerable circumstances and the community financer sector are far reaching and require more support than any one organisation can provide.

And as more and more people become financially squeezed it’s clear that more long term funding is needed to tackle financial exclusion.

The Government’s dormant assets consultation is a key opportunity to secure this and a chance for you to make your views heard.

If you share our vision for a fairer financial future, please respond to the consultation. It’s open until 23:45 on Sunday 9 October 2022 and every response counts.

Read more about how you can respond