Nearly a third of lenders have seen higher numbers of defaulted loans over the past 12 months, new research has found.
A new report from AI-backed transaction analytics firm Fuse also discovered that 31 per cent of borrowers have been rejected by lenders due to failing affordability checks in the last 12 months.
Two thirds (65 per cent) of lenders said that this rejection rate had increased compared to the previous year.
Fuse commissioned a survey of 100 UK lenders, undertaken between 17 April and 2 May 2023. The research comes at a time when many consumers and businesses are struggling amid the cost-of-living crisis, as inflationary pressures and soaring interest rates take their toll.
Fuse found that consumers are increasingly reliant on credit as a result, with young people struggling the most. 43 per cent of 18-34 year olds said that they are reliant on credit to pay for everyday expenses and a similar number (42 per cent) said they will need to borrow money in the next six months to get by.
The rising demand for credit, teamed with the increased number of rejected applications, has raised fears that potentially vulnerable borrowers may turn to higher-cost or illegal credit options. Recent research from Fair4AllFinance found that over three million people have borrowed from illegal lenders in the last three years.
“It is hugely concerning that defaults are spiking – with the cost of living showing little signs of easing, the situation seems set to only worsen for many,” said Sho Sugihara, chief executive and co-founder of Fuse.
“Reliance on credit is on the rise and there are potentially millions across the UK who are at real risk of falling into long-term debt and being excluded from mainstream credit options.”
The Financial Conduct Authority (FCA) has introduced a new Consumer Duty, which sets higher standards of customer care for regulated firms. The rules, which come into effect on 31 July, mandate lenders to provide consumers with higher and clearer standards of support and protection to promote good outcomes.
However, over half of lenders (55 per cent) surveyed said they were not ready for the new rules, while two thirds (67 per cent) said there had not been enough support from the City watchdog in helping them implement the Duty.
“The new Consumer Duty rules will require many lenders to consider new approaches to support borrowers and take a more outcomes-based view throughout the affordability process,” said Sugihara.
“However, the Consumer Duty is likely to just be the tip of the iceberg – the financial system is in immediate need of an overhaul to create a fairer, more inclusive model with vulnerable borrowers at its heart. In order for this to happen, lenders need to utilise insights into borrower vulnerability to help them identify points of need before it is too late.”