Cost of Living: The Impact on UK Borrowing
Purpose
Overview
Our in-depth data analysis of the loans market indicates that people across the UK are increasingly struggling with rising living costs, as evidenced by the increase in the number of people applying for short term – ‘near prime’ – loans, with a peak of 64% between April and June 2022, immediately following the energy price cap rise.
Over the same period the overall volume of applications almost doubled, with a90 per cent increase from around 300k to 570k.This was against an overall downward trend in application volumes seen since December 2021.
These statistics and timings suggest that loan applicants are finding it hard to service existing debts and finance the everyday essentials of life through their normal disposable income, and may be using short term loans inappropriately as longer-term sources of credit.
This is particularly pertinent for people with limited or no access to mainstream financial services. 1 in 7 of the UK population - 7.1 million- are financially excluded.5.1 million have no record of an open or closed current account. 1.7 million have no financial or credit history service activity in the past 24 months. These groups often find themselves paying more for all manner of services, such as home energy and broadband, as a result of their credit rating or lack of access to banking facilities. And as household budgets are squeezed, many may have no option but to turn to expensive short term loans or even unlicenced ‘loan sharks’.
We can see evidence of this in a near 70% increase in the number of people (unique individuals) taking out non-prime loans to pay off existing debts. Some 8,522 made near-prime loan applications in Feb 2021 stating ‘debt management’ as the purpose of the loan request, whereas in February 2022, 14,416 people applied for the same purpose. A notable 75 per cent spike in applications for short term loans to service existing debts was also recorded between April and June 2022, again at the time when energy prices rose for many, adding to the soaring cost of living crisis.
People are also increasingly borrowing to make ends meet; stating the reason for loan as for ‘essentials’, which can include subsistence, every day or unexpected expenses, medical bills, energy bills, rent, mortgage and temporary reductions in income. In Feb 2021, some 15,947 individuals requested at least one loan for ‘essentials’. By Sept 22, that figure rose to 18,920 individuals – a 19 per cent increase. Similarly to loan applications to manage debt, the volume ofshort-term loan applications made to cover essentials rose sharply – by 83 per cent - between April and June 2022.
Younger people are particularly affected. They will typically have fewer savings, lower paid jobs and higher monthly outgoings such as mortgage payments or rent compared to older counterparts, making them less resilient to the increasing costs being seen now. In 2022, the typical profile of a short-term loan borrower in the UK was a single person, renting, aged 26–35 and is applying on average four times a year to borrow £500 - £1000.
Relatively small, unexpected bills may prove more of a tipping point into debt issues for those groups with little or no access to mainstream finance than for others, with payment defaults leading to County Court Judgements (CCJs).Around 1.8 million CCJs have been issued in the UK since January 2020, relating to debts worth £3.4 billion, and the volume has more than doubled over the past two years between August 2020 and August 2022. It should be noted that some of this rise could be due to backlogs created during the pandemic.
Younger age groups, again, are the worst affected. As of October 2022, 26-35 year olds now receive the highest share (31 per cent) of all CCJ judgements.This not only affects their present circumstances but reduces their chances of gaining normal financial services going into the future. An alarming number have a worrying dependency on expensive non-mainstream lending, with a trend of defaulting on highly leveraged loans.
At a time when the cost of living is affecting so many, people with poor credit history and CCJs on their records are in danger of being caught in a cycle of debt – or are already in it.
Demographics
Age
These statistics show that although the short term loan applications span all groups, there is a heavy weighting for 22-55 year olds and particularly 26-35 year olds. Homeowner numbers are relatively low compared to those renting (privately or council) or living with parents. The vast majority are single, which leads us to the typical demographic of a borrower: single, renting and aged 26-35.
Residence
These statistics show that although the short term loan applications span all groups, there is a heavy weighting for 22-55 year olds and particularly 26-35 year olds. Homeowner numbers are relatively low compared to those renting (privately or council) or living with parents. The vast majority are single, which leads us to the typical demographic of a borrower: single, renting and aged 26-35.
Martial Status
These statistics show that although the short term loan applications span all groups, there is a heavy weighting for 22-55 year olds and particularly 26-35 year olds. Homeowner numbers are relatively low compared to those renting (privately or council) or living with parents. The vast majority are single, which leads us to the typical demographic of a borrower: single, renting and aged 26-35.
Financial Exclusion by Region
We can see that the percentage of financially excluded people is lower throughout England, than in Scotland, Wales and particularly Northern Ireland. There may be a number of factors driving this variance - social, cultural or regulatory - not all of which are visible within our data sets.Analysis of Loan Application Statistics
Applicant Volumes
More people are applying for short term loans.
The number of UK adults (unique individuals) applying for short-term (near-prime) loans across the UK rose 64 per cent (from around 137k to over 225k individuals) between April and June 2022 Fig 5) - immediately following the last energy price cap rise and before the government's Energy Bills Support Scheme kicked in, in October 2022.Application volumes spiked too
Over the same period the overall volume of applications almost doubled (a 90% increase) from around 300k to 570k applications, going against an overall downward trend in application volumes seen since December 2021. Similar spikes in applicant numbers were seen between January and June, and October and November 2021. The latter spike coincided with the first energy price cap rise.
The increase in applicant numbers over the period suggests that people were increasingly turning to non-prime, some perhaps for the first time. Average loan request values have also steadily increased since early 2021, as we see in the following section.
Loan Value
Fig 8 and 9 shows that in early 2021, a quarter (26%) of applicants were applying for loans in the range of £250-499 and another quarter (25%) were applying for loans in the range of £500-999. By Dec 2021, the share of loan requests in the range of £500-999 was up to 31%. By April 2022, the majority of loan requests were for higher amounts of between £1000-4,999 and remained consistent throughout 2022.
Requests for higher value non-prime loans of between £5000-9999 also increased over the same period, from 4% to nearly 6% of all applications.
Loan Term
In 2021 and 2022, a quarter of all applicants (25%) made between four and ten applications. One in three (32%) applicants applied just once; one in three applied 2-3 times (32%); and one in eight made 4-5 applications.
The fact that people are opting for these types of loans with such frequency suggests that they have no choice and are otherwise excluded from more appropriate and affordable prime credit.
Our analysis also indicates that people are using short term loans inappropriately as longer-term sources of credit. Fig 10 shows that whilst the majority (47%) of short term applications made were for periods of less than 8 days, two in five (42%) were for longer periods of up to 30 days and more than one in ten were for periods of up to 90 days. Near-prime loans are designed and priced to be for very short-term borrowing, as bridging loans to top up finances until payday. Paying back over longer periods can make the overall cost of borrowing significantly higher.
Loan Purpose
Over the period there was a big increase in the number of people (unique individuals) applying for non-prime loans to pay off existing debts. Loans being requested* for 'debt management' and 'essentials' both trended up from Feb 2021 - as the above graph shows.Debt Management
8,522 individuals made non-prime loan applications in Feb 2021 stating 'debt management' as the purpose of the loan request. In February 2022 that had risen to 14,416 people applying - a near 70% increase.
A notable 75% spike in the volume of loan applications to service existing debts was also recorded between April and June 2022 immediately after the energy price cap was lifted: a consistent trend.
Essentials
People are also borrowing to 'make ends meet': in Feb 2021, some 15,947 individuals requested at least one loan, stating loan purpose as being for 'essentials'. By Sept 22, that figure rose to 18,920 individuals - a 19 per cent increase. 'Essentials' can include the following definitions: subsistence, everyday expenses, unexpected expenses, medical bills, bills, rent, mortgage and temporary reductions in income.
The volume of short-term loan applications where the reason for the loan was stated as essentials rose by 83 per cent between April and June 2022.
Please note: Loan purpose is a self-declared attribute of the loan application process and is not independently or officially substantiated or verified data.
CCJ Analysis
CCJ Volumes
Almost 1.8 million CCJs - legal judgements pertaining to personal debt defaults - have been issued to UK adults since the start of 2020, relating to debts in excess of £3.4 billion.
May 2020 - during the time County Courts were largely closed due to COVID restrictions - saw the lowest level of CCJs over the period, after which volumes began increasing significantly.
Since August 2020, they have seen a strong upward trend. CCJ volumes have more than doubled over a two-year period, from 26,000 to nearly 61,000 cases, with the largest year-on-year rise in volumes 164% between August 2020 and August 2021.
The sharp increases likely reflect the effects of lockdown and subsequent cost of living crisis on people's personal finances, particularly once the government's fiscal support packages came to an end. The rise in volume suggests that increasing numbers of people are defaulting on their debts as their budgets become squeezed and they struggle to make ends meet. Some of the rise may also be the result of County Courts working through backlogs caused by lockdowns.
Judgement Value
Average values of a CCJ remained relatively steady over the 2021-2022 period at between £1,700 and £1,900. In contrast, in Q2 2020 - around the time of the first national lockdowns - average judgements were around 40 per cent higher at £2,500, perhaps an effect of people suddenly losing their income.
The data in fig 13 and 14 shows a significant upward trend in lower value (£250-500) CCJs over the period. In October 2020, judgements valued at £250-500 represented 23% of all those issued, while almost 46% were for debts over £1000.
However, by October 2022, a third of CCJs were for debts of £250-500 and the proportion of higher value CCJs had fallen to around 35%. That said, as of October 2022 the higher £1,000-£9,999 bracket remains the most common value bracket for a CCJ in the UK (35% of all judgements), although this has fluctuated throughout 2022, as the graph shows.
This data suggests that people across the country are struggling with rising living costs, and may be finding it hard to service existing debts with their normal income.
CCJ by Age Group
Over the whole period (2020-2022) 36-45 year olds have received the most court judgements relating to debts owed, with in excess of 547,000 judgements ruled against them in total.26-35 year olds have received a total of 529,000 over the two years. But since March 2022, as the graphs show, 26-35 year olds have become the group most likely to default - the most recent full month figures, from October 2022 show a third (31%) of CCJs were issued to 26-35 year olds, and 28% to 36-45 year olds. Although representing a smaller share of total judgements, 22-25 year olds (fig 16, lower line) were receiving a steadily increasing share of CCJs throughout the period - doubling from 3% to almost 8% of all judgements. This group's reduced ability to maintain an income due to the impact on service industries during COVID lockdowns may have been a factor in this increase.
As previously stated, younger people will typically have fewer savings, lower paid jobs and higher monthly outgoings such as mortgage payments compared to older counterparts, making them less resilient to the increasing costs seen now. Relatively small, unexpected bills may therefore prove more of a tipping point into debt issues for these groups, than for others.
The data also shows a significant positive correlation between a person's age and the value of their court judgement (Fig15: illustrated by the blue line): 26-35 year olds will typically owe just under £1,400; rising to £1,600 for 36-45 year olds; £2,000 for 46-55 year olds; £2,600 for 66-75 year olds and £4,500 for 76-85 year olds.
For millions of people currently financially excluded, the future can and should be brighter and fairer
Our financial exclusion report was published freely on a dedicated landing page, and we then launched a series of UK-wide roundtable think tank sessions, inviting leaders from across the public, private and third sectors, to discuss how the findings should shape future policy. The report attracted considerable interest from leading public figures responsible for delivering UK Financial Inclusion reform.
The Way Forward
In the face of the biggest cost of living crisis in living memory, this vital analysis can help inform public and third-sector policy and action.
The LexisNexis® Risk Solutions Financial Exclusion report found that around 7.1 million adults (one in seven) in the UK are defined as potentially financially excluded, meaning they struggle to access the most affordable credit. There are many reasons why an individual may be in this situation. One of them is the way credit worthiness is assessed.
We believe that around 5.5 million are unnecessarily excluded and could pose a low credit risk were extra filters and analysis of their financial records - or lack of them - applied. LexisNexis® RiskView UK can help provide a more holistic view of an individual's actual creditworthiness, enabling businesses to give access to fair and affordable financial services for millions more UK adults.
The FCA's Consumer Duty rules and guidance, coming into force over the next two years will also set higher and clearer standards of consumer protection across financial services and require firms to act to deliver good outcomes for customers.
