In Focus Consumer Credit


Those no-win situations


Sometimes it can be almost impossible to decide if a loan is appropriate, but lenders must continue to try


Harper Wright Financial education expert financial.education.service @gmail.com


Consumer lenders are regularly faced with a number of no-win situations. A common one, which we have all experienced, is the marginal applicant. After being declined for credit, some applicants will go to great lengths to prove that they can afford to repayments and qualify for the loan. Then, if the borrower experiences financial


difficulty, they will say “it is all your fault; you should not have given me the loan, I could not afford it”.


Advocates Consumer advocates have two major issues with consumer-credit providers: irresponsible lending and lack of affordable credit for borrowers on benefits or low incomes, another no-win situation. Recently there were headlines in some of


the tabloids about banks driving customers into the clutches of loan sharks when they tightened up their credit criteria in the post-2008 financial crisis world. The criteria were made stricter to avoid


some of the examples of irresponsible lending, and, as a result, people who may need credit could not qualify under the more responsible criteria.


Affordability Any discussion about the lack of affordable credit needs to take into account that there must be disposable income in order to repay the borrowing. Unfortunately, people on benefits or low


incomes – also known as the ‘financially challenged’ – do not, as a rule, have much, if any, surplus income. There may be a clear need for the borrowing, for example to fix the car or boiler, or to buy school


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uniforms, but there must also be a clear source of repayments. The issue of affordability often focuses on


high APRs, but this ignores the fact that the majority of costs for small consumer borrowings are fixed, rather than being the cost of the money lent. The overheads for


reviewing an application, setting up the loan and collecting the repayments when due are more than the cost of interest. If costs of collecting late payments and charge-off are included, interest costs are negligible in today’s low-rate market. For the borrower, keeping the repayments


as small as possible is often critical. However the downside of stretching the


The criteria were made stricter to avoid some of the examples of irresponsible lending, and, as a result, people who may need credit could not qualify under the more responsible criteria


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repayment term is that it may exceed the useful life of whatever was financed. For example, a loan for school uniforms should be cleared before the child needs a larger size, and not over a longer period to make the payments smaller. There is no easy answer to this no-win


situation, but regular dialogue with consumer advocate groups will promote understanding which will benefit all concerned. CCR


July 2017


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