While it was hoped in many quarters that the Covid-19 pandemic was a short-term problem that would get managed well and blow over quickly, sadly that’s not the case. Four months into various levels of lockdown in the UK, Europe, Asia, and North America, the drama continues with much loss of life, job losses (including record claims for employment benefits), personal financial setbacks, and more.
Personal Finance Market is Shaken
Looking towards the personal finance market and the personal loan market specifically, the news isn’t good. There’s been a need to almost continually assess and reassess the situation as the news continued to worsen, the impact became more severe, and the long-term prognosis continued to be up in the air.
The New Normal, such as it will be, is still a picture to be formed in all aspects of life, not least including the lending market in the UK, Europe, and beyond.
Understanding the Size and Scope of the Economic Problem
As noted in many publications recently, the UK government sorrowfully reported that the economy had shrunk in April by 20.4%. Indeed, the official statistical body, the Office for National Statistics (ONS) noted that the decline was historic, which may have even been understating the facts.
To put this into perspective, the 2008-9 recession saw declines that were one-third as steep as what happened in April 2020. It affected people across virtually all industries, though admittedly some industries more than others.
UK People Learn the Furlough Word
To stave off complete disaster, the Chancellor in the UK introduced a variety of measures intent on keeping people calm. These included a furlough scheme where different groups – eventually including some self-employed people too – had 80% of their salary covered for a limited period. Close to 9 million people, roughly 25 percent of the employed UK’s workforce, has since joined the scheme.
However, with less money coming in despite the Furlough scheme, anyone who requires a financial loan may struggle to do so. For them, the picture is harsher still.
Risks of Personal Loans in an Uncertain Time
For financial lenders, assessing the risk of issuing new personal loans had, for a while, become an exercise in futility. Given the completely unprecedented and unexpected situation that we all find ourselves in, and not knowing how long it will affect both the economy at large and personal incomes (jobs) in particular, risk assessment was proving challenging in the extreme.
Personal Lending Put on Pause
Many brand name personal financial lenders immediately put a freeze on issuing new loans until the situation became clearer. Would people continue repaying loans this month and still have the income capacity to continue paying over the 1-year, 2-year, or longer-term of the loan? Unable or unwilling to offer shorter-term loans due to the administration time involved, many personal lenders just closed up shop.
The Risks are the Risks
As this Forbes article pointed out, the Chinese word for risk includes danger, but also opportunity as well. Essentially, the risks are the risks… you better get on board with them because this is a new reality right now.
Shutting up shop is not the answer.
Some Lenders Have Begun Addressing Risk Levels by Changing Terms
Some traditional lenders have slowly, in the last month or two, begun to reopen and try fresh approaches to personal lending. However, for consumers, the net result has been personal loan offers with markedly higher interest rates and often greater restrictions. Just like how insurance companies sought to not cover Covid-19 for travel insurance policies despite the reality that many travellers now needed it as an entry requirement to other countries, they were going in the opposite direction.
Some banks were taking the approach that they would only lend when the terms were extremely favourable to them. This included multi-year terms that increase what the financing would cost because it took forever to get their lending repaid.
Borrowers Looking Elsewhere for New or Alternative Solutions
When it became obvious that the various government responses weren’t going to save people – merely keep them afloat for a short time – it dawned on everyone that they’d better learn to deal with the issue. Trying to step over the problem or ignore it wouldn’t be a good enough response.
Personal borrowers started to look at alternative lending options when the high street banks began to panic. It has been an interesting development.
FinTech Sees Higher Usage
Many FinTech apps have seen increased usage across the board. For instance, FinTech apps that cover the pan-European market experienced a 70+ percent jump in activity on their platforms in March alone. The brain trust behind many FinTech companies is advanced, youthful, and highly adaptable to change – far less so compared to stodgy banks, which are often the slowest to adapt to changing consumer lending demands.
Getting Loans Where They’re Available
A clear sign that consumers are willing to sidestep the banks is in pursuit of a new personal loan.
There is a much wider group of financial companies that are authorised to operate in the UK or across Europe that provide loans to individuals. This includes direct payday lenders that have been issuing fast, short-term loans to financial customers for decades.
A company like Payday UK is perfectly positioned to offer short-term loans to consumers who find a need for one and are struggling to locate or pass approval through their consumer bank. Many people are frustrated by the lack of cooperation of the High Street banks and realise that they need to look further afield to satisfy their requirement or be held back.
Will the Growth in Alternative Funding Solutions Continue?
It is likely that uptake in using alternative sources to get personal loans approved outside of what’s traditionally been seen as the mainstream will continue. Frankly, with a more cooperative lending programs and faster approval/denial responses, consumers will remember a positive experience and when they need a loan, or a friend does, they’ll steer in a new direction.
In an age when convenience, speed, and customisation are seen as important to people, hitting a brick wall or an inflexible one, isn’t a pleasing outcome. While some banks will offer payment holidays to people who have suddenly become unemployed, their benevolence will not last. And anyone who has tried to get a personal loan recently and found that they got turned down (along with other people they know), knows it leaves a sour taste in the mouth.
Many financial organisations have the lending capacity to satisfy the personal finance market. While this fact may have alluded consumers before, one potential upside to the suffering this year is that people are more aware of their personal financing options than ever before. Once this knowledge is embedded, it’s not easily forgotten. And nor is when alternative lenders were willing to still lend while the traditional market closed down.
The lessons for the personal loan market are that if you fail to innovate and adjust to sharply modified risk profiles for the issuance of new loans, consumers will go elsewhere. While people used to have few choices like talking to their local bank manager to apply for a loan in person, those restrictive days are long gone. Personal lenders need to accept the new reality, or they may find their core customers going elsewhere in the future.