Times are changing
Jeff Knight director of marketing at Foundation Home Loans
People still seem nervous about talking about clients who are struggling to meet mainstream lending criteria – caused by their current credit rating or historic credit-related issues.
Yet the times they are a changing and more and more clients are falling into these categories, although don’t panic, we’re not seeing a pre-credit crunch market return.
The source of these issues can stem from many different sources. However, it appears that the rise in take-up of buy now, pay later (BNPL) schemes – which allow consumers to spread the cost of a purchase – is opening the door for even more people to fall into arrears, miss payments and generate potential blips in their credit history.
It’s been reported that consumer debt has increased by £60bn in the last five years, and this trend is only likely to grow as more goods and services are being supplied on a subscription basis or via regular payment methods.
A recent study by Compare the Market highlighted that BNPL schemes appear to encourage borrowing, with two-fifths of shoppers admitting they spend more than they usually would without the scheme and more than half feeling that a BNPL scheme had contributed to their increased levels of personal debt.
In addition, the study outlined that one in five people used such a scheme in the last 12 months – the equivalent of 10 million people across the UK and more than two million UK adults have damaged their credit score by opting to delay payment on purchases.
The brunt of the BNPL problem is suggested to be shouldered by young people. 25 to 34-year olds are said to be particularly dependent on BNPL, with nearly a third (33%) using the scheme during the past year. As 39% say this has damaged their credit score, BNPL may have the unintended consequence of making stepping onto the housing ladder even more difficult for this age group.
We, as an industry, know that a missed payment will result in a black mark on a credit report, potentially damaging a credit score, but this is something that a whopping two-fifths of people surveyed didn’t realise. And this is a statistic which rings sets alarm bells ringing.
So how can intermediaries help clients through this process?
Even a small blip such as an expired credit card or missed phone bill can impact credit ratings and lead to rejection down the line from some high street lenders.
For those clients with historic credit blips, it’s important that intermediaries are well-positioned to help them, either through established relationships with a range of specialist lenders or partnerships with specialist distributors.
Access to expertise and experience is vital. Specialist lenders have flexible, manual underwriting practices to enable them to get a better understanding of a borrower’s personal financial situation and match them with an appropriate solution – if possible. We also work closely with specialist distributors who package such cases in the most effective way possible for lenders, introducers and the end borrower.
As a lender we also have to play our part in helping our intermediary partners to better identify the types of clients who are not only susceptible to credit-related issues but also how to overcome them and then set them on a more mainstream path.
All too many people still feel that previous credit blips will curtail any future mortgage requirements. This may be the case in the more severe cases, but there are many others who are eligible for a mortgage without realising it.
Thankfully, an increasing number of responsible and highly competitive solutions are emerging throughout the specialist lending market. And it’s those intermediaries who are tuned into these trends who will be able to service a wider range of their client’s needs, whilst also bolstering business volumes and retention levels.