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Covid-19 Driving Half of Borrowers to Higher Cost Credit Options

Credit Kudos' first Borrowing Index explores the impact of Covid-19 on individual's borrowing behaviour

by Phoebe Allen24th June 2020

London, 24 June 2020 – The Covid-19 pandemic has had a devastating effect on people’s finances and is driving them towards payday lenders and other high-cost credit, according to Credit Kudos’ first Borrowing Index.

The survey of 2,000 UK adults found that nearly three in ten people (28%) have had their income impacted by Covid-19. A quarter (26%) have already had to borrow, taking out  £1,719 on average, with people using the money to pay for food and other household essentials (48%) and utility bills (41%).

This trend looks likely to continue. 21% expect they will need to start borrowing or borrow more over the next three months, and 86% of those who have already taken out credit expect to continue to do so.

However, many mainstream lenders are stopping lending because traditional credit reports are limited and feature information that can be inaccurate or 30-90 days out of date, which can make it difficult for lenders to ensure they are meeting affordability regulations. It’s therefore increasingly difficult for financial institutions to lend as they would normally and, as a result, borrowers are having to turn to higher cost options.

Freddy Kelly, CEO and co-founder of Credit Kudos, said: “The Covid-19 outbreak has resulted in widespread job losses, and even many of those lucky enough to still have a job have seen their income shrink. It's clear that people need to borrow to help them weather the storm but, with many lenders tightening their rules, it's driving people to use higher cost options they might never have considered before.

"Lenders can't lend if they don't know someone's current financial situation or ability to repay, but traditional credit bureau data can be inaccurate and out of date. Open Banking provides lenders with in-depth, up to date information based on transaction data someone shares from their current account. This helps lenders to make more informed decisions, allowing them to support more people during this difficult time."

A third (32%) of people have been turned down for some form of lending, and 31% of them admit that being turned down for a loan has put their family under huge pressure in the current economic situation.  Those who have previously been rejected for a loan are 25% now say they are more likely to consider an alternative high-cost lender (31% vs 6%) and, worryingly, over half (51%) of people who are currently borrowing have had to turn to high-cost credit, such as payday loans or guarantor loans.

Credit Kudos is a challenger credit reference agency that draws on the data available through Open Banking to provide a real challenge to the incumbent credit reference sector and help more people access fair and affordable credit. The company uses Open Banking data, shared by borrowers, to measure financial behaviour and replace traditional, narrow methods of credit assessment, enabling lenders to provide credit to people who can afford it.