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Consumer Credit Lenders are ready today
Unlike previous times of economic uncertainty, most providers of fi nance are well prepared for the impact of higher interest rates and cost-of-living increases
David Wylie Director,
LendingMetrics
When I wrote about rising infl ation in these pages six months ago, little did I know that my prediction would appear to be somewhat on the low side. At the time, I saw prices rising to 4% ‘or
more by the second half of 2022’. Now, I can see that my ‘or more’ should have read ‘considerably more’. Even without the invasion of Ukraine, the UK was looking at infl ation hitting 6% by the Spring (source: Bank of England). Now that we have the long-feared Russian aggression, and what looks like the phasing out of European dependence on its energy, who knows what the Consumer Price Index is going to be by the end of the year.
Variables Given the number of variables at play, even the most reliable of sources is going to fi nd it diffi cult to predict. Most though would put money on it being a lot closer to 10% than is comfortable. For lenders, such a high infl ation scenario should cause some concern. For, where infl ation goes, interest rates invariably follow. And there is obviously a well-established link between higher interest rates, testing economic times, and the incidence of late payment and default, particularly for those with variable rate fi nance. The further north the interest rate goes, the
greater the level of grief for any lenders’ loan book.
Markets
Financial markets were pricing-in four interest rate rises for 2022, taking the Bank Base Rate to 1.25% by year end, before Ukraine. Given the confl ict in eastern Europe, we are going to have to consider that, like my infl ation
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Financial markets were pricing-in four interest rate rises for 2022, taking the Bank Base Rate to 1.25% by year end, before Ukraine. Given the confl ict in eastern Europe, we are going to have to consider that, like my infl ation prediction of last year, there is a risk that this could fall some way short of the mark
prediction of last year, there is a risk that this could fall some way short of the mark. I know the Bank of England has suggested
that the Russian invasion may delay its rate rises, however, if infl ation persists, it is bound to hike them in line with its mission to keep infl ation under two per cent. The interest rate rises will come later, but they will still come.
Ultra-low rates UK borrowers used to a long period of ultra-low interest rates, may be looking at a BBR of two per cent or more by the end of the year on top of all the other escalating costs. Today, 2%may prove to be a worse-case scenario, but whatever happens during the coming months, lenders are going to be moving into waters they have not navigated for the best part of 20 years. British borrowers have become used to stable rates of under 0.75%. You have to go
www.CCRMagazine.com
all the way back to 1988-1990 and 2003-2007 to fi nd periods when interest rates increased sharply from a low base.
Struggle Then – in line with all previous periods of higher and rising interest rates – many borrowers struggled as their monthly payments grew. Aggregate default rates rose. The cost to lenders varied according to
the quality of the loan book and ability to handle the changing situation. For a few the rising adverse lending was fatal for profi ts, for others less so, but for all these were unsettling periods. This time around, thankfully, lenders small
as well as large, are in a far better position to ride out the impact.
Technology Technology, undreamt of at the turn of the twenty-fi rst century, will allow them to weather such stress tests. Where analogue processes in the 1990s meant meaningful data was to all intents and purposes unobtainable, fi ntech suppliers now mean that it is easily accessible and in an instant. Plug-and-play automated platforms enable
lenders to precisely calibrate the level of risk they are willing to take with every single applicant. A risk that they can scale up, or down,
according to the changing environment. And, because they can take a granular view of each applicant and obtain a real-time insight into their activity, lenders are less likely to make poor lending decisions.
Turbulent times Ideally, the turbulent times we are entering require lenders to be able to recalibrate
June 2022
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