Britain’s cost of living crisis is at an all-time high as millions of households fall behind payments and struggle to make ends meet.
According to Neil Kadagathur, CEO at U.K. FinTech lender Creditspring, self-reported utility expenses have gone up by close to 30% in the last six months, while transportation expenses have increased by 15%.
“People who already had on average less than £100 of savings at the end of the month have just seen their expenses increase way bigger than their wages,” Kadagathur told PYMNTS in an interview.
In that tough climate where savings are depleting fast and the lack of safety net is becoming even more visible, it is not surprising that U.K. borrowers are turning to credit to keep their heads above water. But Kadagathur said not all lenders have borrowers’ interest at heart, and in their quest for quick credit relief, borrowers must avoid payday lending 2.0 products that turn manageable debt into bigger ones that spiral out of control.
“[With those short-term loans] there’s no onus on the lender. As long as they get enough people through the door, they don’t care if people [can’t] pay back,” he argued.
Moreover, the fact that many people do not even consider such products debt and are not aware that it could affect their credit record is getting them into more debt than they would have intended to get into in the first place, Kadagathur said.
It’s no surprise then that the idea of lenders making money off the mishaps of borrowers has given lending such a bad reputation today, he added. “It all goes down to this concept of attaching an interest rate to the loan so that the more you struggle to repay a normal loan, the bigger the debt becomes [and favors the lender].
Inclusive, Fixed-Rate and Affordable
Opting for a subscription finance model that is more inclusive and affordable is the way to go in this difficult environment, Kadagathur said, pointing to Creditspring’s fixed-cost, low-risk solution as a prime example.
“We don’t charge any interest rates. We charge a fixed fee to have access to a loan — not the rate — and that’s very important because by removing a rate we’ve made it extremely easy to understand exactly how much borrowing is going to cost you. People think in UK pounds and pence or in the US dollars and cents, they don’t think in rates,” he explained.
And not only does capping costs help borrowers make a sound financial decision, it is also a fairer charging structure that completely eliminates the risk of a debt spiral. “[For] our borrowers, their costs [and debts] will never grow so we help keep small problems as small problems,” he remarked.
In the grand scheme of things, Kadagathur said interest rates should no longer exist because they were only relevant prior to the existence of credit bureaus when lenders needed an interest rate to make sure they got paid on time. Today, however, borrowers are increasingly mindful of maintaining a good credit record and putting more effort into paying back on time, limiting the need for interest rates.
And in the end, only financial institutions stand to benefit. “Now the banks are sort of getting a win-win. They know that you’re going to pay on time due to the credit report, but they’re also going to make money off of you if you’re late because they’re going to charge an interest rate,” he noted.
Perhaps an Anglophone Trend?
The London-based Fintech lender announced in May that it had secured $60 million in new capital, bringing its total funds raised since its 2016 launch to $88 million.
With those funds, Kadagathur said they’ll be looking to expand their customer base which has already grown by 50%, from 100,000 to 150,000 since the start of 2022, while working towards achieving profitability in the next 12 to 18 months.
And while the company is fully focused on the UK, they have noticed the same problems in the U.S. and an even bigger lack of safety net for borrowers there and will be looking to capitalize on the opportunity in the next 18 to 24 months.
In the meantime, Kadagathur said U.K. lenders should expect a massive increase in credit demand. At Creditspring, credit applications submitted in June and July this year were almost twice the number of applications seen 12 months prior.
There’s also been an increase in people requesting forbearance in the last few months as well as a surge in late repayments. But all in all, Creditspring is committed to helping borrowers come out of debt instead of exploiting those who are struggling.
But while they’re keen on protecting borrowers, lenders must be on guard as well. “It’s important to be responsible during this time. We’ve taken a responsible approach where we’ve actually increased our criteria to get accepted because we’re not aware of what the next sort of six to 12 months hold for us,” Kadagathur said.
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