LONDON (Reuters) – When a payroll glitch left Natalie Gallagher so short of cash this month she couldn’t afford her bus fare to work, she turned to her usual lender Amigo for an emergency top-up loan.
But she was out of luck. Like many of the lenders that thousands of higher-risk borrowers in Britain depend on, Amigo had tightened its criteria for handing out cash in the wake of the coronavirus.
“They approved my top-up but 10 minutes later I got a text saying my reason for the top-up isn’t one they were doing right now,” she said. “Amigo was my only real option.”
While mainstream banks have been obliged to give customers payment holidays on mortgages and discounted three-month 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 customers while others have been unable to extend cash lifelines to borrowers since lockdown restrictions banned weekly visits by doorstep lending agents to their homes.
According to the Money Advice Service, about 17 million people in Britain have less than 100 pounds in savings to dip into when a crisis strikes 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, the Centre for Social Justice think-tank said last month.
“The bottom line is that there’s nowhere for these people to go,” Roger Gewolb, founder of loan comparison site FairMoney said. “The consumer lending market has come to a standstill.”
Gallagher, 29, from Manchester in northern England, said while past debts with payday lenders such as Wonga had damaged her credit rating, she was surprised to be rejected this month.
“I’d understand if I wanted a new loan or had missed payments but I have never missed a payment,” said Gallagher, who works with offenders.
A spokesman for Amigo said Gallagher’s request was declined because the purpose of the loan wasn’t covered in its current lending criteria, which have been tightened since the pandemic.
“An Amigo loan is intended for considered purchases, rather than day-to-day expenses; this is why the minimum loan we offer is 1,000 pounds ($1,225).”
SHORT OF OPTIONS
While some low-income borrowers just struggle to budget, others have been blacklisted by the mainstream financial system and rely on alternative credit providers such as guarantor or doorstep lenders to make ends meet.
Credit score provider ClearScore, which shows consumers what deals are available based on their circumstances, said subprime borrowers could on average access only 0.17 of loans in a snapshot of the market on May 16. On Jan. 1, the average was 1.
On the same date in May, prime borrowers on average found 1.79 loans available, while those in the middle, or non-prime borrowers, found 0.81 products on average.
Britain’s largest subprime lender, Provident Financial Group, has tightened its underwriting criteria while rival Non-Standard Finance is now only lending to key workers such as doctors, nurses, supermarket staff and 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-up Britons have sought government welfare payments, with 2.5 million applications for Universal Credit benefits between March 16 and May 5.
Almost 11 million people have missed or expect to miss a bill that could result in bailiff enforcement and even eviction, research from the Citizens Advice Bureau shows.
Debt charities say the absence of government schemes to help indebted Britons at a time when subprime lenders are pulling back from the market has been keenly felt.
“High-cost short-term credit may seem to offer a short-term financial stopgap but too often it can become an expensive repeat trap,” said Sue Anderson at debt charity StepChange.
“It is unlikely to represent a sustainable solution to people’s financial pressures, whereas a well-designed no-interest loan scheme could potentially make a helpful 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 come to fruition.
A Treasury spokesman said it remained committed to working with stakeholders with a view to piloting a scheme to support the most vulnerable and sustainable over the longer term.
Lenders are prohibited from selling credit to anyone they don’t think can pay it back, which is likely to exclude many people who have lost their jobs so far in the pandemic.
That means those employed in industries hit badly, or those who have seen their household income cut whilst on furlough, are finding a dwindling range of options among subprime lenders.
“I would imagine 35% of the population are now in this non-prime or subprime position and there’s more coming,” FairMoney’s Gewolb said. “All they can do is find a guarantor or have a conversation with a guy down the boozer who has friends with baseball bats and no consumer credit licence.”
The England Illegal Money Lending Team, which investigates and prosecutes loan sharks, said it was launching a live website chat on May 26 to give victims another safe way to seek advice and support.
“These unpleasant individuals spell nothing but misery for those who borrow money from them,” team head Tony Quigley said.
Based on data from 2018 and 2019, the organisation said it took an average of 2.75 years for someone targeted by predatory lenders to engage with the authorities, suggesting any spike in loan shark activity now might not be visible until 2023.
Analysts say it is no surprise subprime lenders are acting cautiously. Even in benign market conditions, companies serving subprime customers typically absorb higher defaults than banks who focus on higher-quality borrowers.
In 2019, 13.6% of the loans made by Provident’s subprime credit card business Vanquis turned bad, while the so-called impairment rate for its doorstep lending was 39%.
But for loans made by 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 British economy, few mainstream lenders say they are prepared to help borrowers who didn’t measure up before the pandemic.
David Duffy, chief executive of Virgin Money, said the bank was prioritising existing clients and had not considered altering its lending criteria to offer credit to subprime borrowers.
A spokesman for the banking trade body UK Finance, said: “Lenders work hard to ensure the balance is right between helping customers to budget effectively and meet their payment needs while lending responsibly and ensuring longer-term affordability.”
Others were more blunt about a subprime shutout.
“It’s almost certain people won’t be able to get credit,” one senior banking executive said. “Clearly if you are in that category, then you are in a much more difficult scenario.”