The UK lending market for higher-risk individuals has contracted by around 34 per cent since 2019, as unsecured loans from unregulated lenders have risen significantly, according to a new whitepaper from ClearScore, the financial services marketplace.
Lending market contractions appear even steeper for UK customers with the lowest credit scores (‘sub-prime’), who saw a 76 per cent decline in the number of loans offered since 2019. This sharp decline comes as many guarantor loans and high-cost short-term credit products have been removed from the market through a combination of regulation and commercial considerations.
The findings come from the latest ClearScore whitepaper, ‘Building a non-prime lending market that delivers for UK consumers‘, which uses EY analysis to show how access to credit has worsened in recent years.
Since 2019, guarantor loans to sub-prime customers have declined 99.6 per cent, high-cost short-term credit loans to sub-prime customers have declined 96 per cent, and home credit loans to sub-prime customers have fallen 91 per cent.
Against this backdrop of rapidly declining availability of regulated credit to sub-prime customers, unregulated lending has risen, including buy now, pay later (BNPL) and in some instances, illegal money lending. The rate of BNPL loans to unserved customers (those with access to zero loans) grew 53 per cent since 2021, and in October 2023, almost 20 per cent of unserved consumers using BNPL were already in arrears.
Actioning change
The ClearScore whitepaper also outlines recommendations for regulators and the UK government, to support and broaden access to the regulated market. Recommendations include:
- Setting a clear strategy and vision for a well-functioning non-prime lending market to rebuild investor confidence and broaden access to regulated credit for a wider group of customers.
- A commitment to reviewing how the cost of credit is communicated to customers: both to increase understanding of the true cost and improve investor and lender appetite to offer short-term loans to non-prime customers.
- Working with the Financial Ombudsman Service to provide greater clarity on the role of open banking in underwriting for higher-risk borrowers to support better lending decisions and offer better rates to consumers.
‘Already vulnerable consumers are being shut out of accessing credit’
Andy Sleigh, COO of ClearScore, said: “The non-prime lending market is broken, creating a dangerous situation where already vulnerable consumers are being shut out of accessing credit. At ClearScore, we believe that everyone deserves access to affordable and appropriate credit for their individual circumstances.
“With the continued cost of living squeeze, however, these people are being forced towards unregulated, and sometimes high-cost options which can have major long-term implications on their financial resilience and overall wellbeing.
“The problem has gone ignored for too long. The government and regulator need to step up and commit to creating a fair, accessible and sustainable market which delivers better outcomes for all consumers across the credit spectrum.”
Christopher Woolard, partner at EY, and chair of the EY Global Regulatory Network, also added: “The UK consumer credit market has seen a decline in choice for consumers in recent years, especially for those considered to be at the ‘higher risk’ end of the scale.
“This research highlights that more must be done to help those who need to access credit. Both the UK government and regulators have recognised the need to act and make changes, but this analysis shows more speed is required. The UK needs a long-term strategy for the non-prime lending market, combining efforts from the public and private sectors to rebuild confidence and broaden access to regulated credit.”
