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It seems that every day brings new headlines relating to some form of lending.  Recent events have brought business and mortgage lending under close scrutiny.  Now, however, people are starting to ask questions about what the pandemic means for consumer lending.

Issues with consumer debt go back to long before the pandemic

Back in 2014, the FCA began a crackdown on payday lenders.  Back in 2018, the FCA introduced new rules around “persistent debt”.  Rather ironically, 2018 was also the year Wonga collapsed into administration.  Sadly, however, the collapse of Wonga did not signal the end of the UK’s consumer debt issues.  This was evidenced by the measures the government took to cushion borrowers, both consumer and mortgage, from the impact of the coronavirus pandemic.

The coronavirus triggered both saving and borrowing

While the Bank of England reported record savings and consumer-debt repayments, the papers reported the plight of those who were having to borrow just to make ends meet.  Arguably, these stories are two sides of the same coin.

Those who maintained their income over the lockdown (for example the furloughed), prioritised saving and paying down debts.  This was very possibly because they did not know what the future would bring and hence wanted to prepare themselves for the worst as best as they could.  Those who did not maintain their income had to prioritise living expenses over debt repayments and sometimes even had to borrow for basic expenses.

Where now for lenders?

Lenders, effectively by definition, need to keep making loans in order to make a profit.  They will be under even more pressure to do so if the Bank of England really does implement negative interest rates and they face the prospect of being charged to hold cash deposits.

At the same time, however, lending is a regulated environment.  This means that the lender has a responsibility to ensure that they only lend money to people who can actually afford to repay it.  Given the current economic climate, this may prove something of a challenge.

All in all, it’s hard to see how consumer lending could avoid at least a temporary slowdown.  It’s also hard to predict how this would impact consumers who still wanted to borrow.  On the one hand, if lenders are desperate to reach a shrinking customer base, there could be good deals to be had.  On the other hand, if lenders decide to pull back from the market and wait for better days, it could actually lead to borrowers being charged more.

Where now for borrowers?

COVID19 is currently looking like it could keep going until (at least) 2021.  What’s more, it’s literally anyone’s guess how long it will take for the UK to resolve the economic chaos it has created.  Then, of course, there’s Brexit, which is now less than five months away.  While nothing is guaranteed until it happens, at this point, everyone should probably be planning for the worst.

This means that, over the longer term, the outlook for borrowers may end up being fairly similar to what was observed over the main lockdown period.  People with incomes will do as much as possible to live within their means and pay down any existing debt.

People without incomes (or on very low incomes) will have to prioritise living expenses and lenders will just have to find a way to accommodate this.  They are already expected to show forbearance to people who are struggling financially.  It seems reasonable to assume that there will be regulatory, governmental and public pressure on them to be as flexible and lenient as they possibly can with those who are in the most vulnerable financial positions.

Not to put too fine a point on the matter, the next few years may be the years the UK’s financial services sector is expected to show its gratitude for 2008!

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