When supply doesn’t meet demand 

Low income households don’t usually have access to savings, credit cards or overdrafts, so a small loan is the only option when they want to buy a larger item or pay for a one off cost. Often the first option is family, then friends and then credit providers. We also know that an estimated 1.02m people are using illegal money lenders, with 62% of those having an income below £20,000p.a This is an estimated increase of over 800,000 people since 2010, in an era where more regulation has been brought in to help consumers. The relatively small pawnbroking market has increased by 20% from 2021 to 2022 alone, with lending increasing from £144m to £174m: people are selling their possessions to get access to cash. 

If people can’t access a cash loan then the next option is to try for a small goods loan. These come in a variety of products, but Buy Now Pay Later (BNPL) is probably the most well-known option at the moment. It’s easy to access as there are no, or very limited credit or affordability checks and with 0% interest it looks like a great product if you only access what you can afford to repay. However due to the lack of checks people are using much more BNPL than they can afford and getting themselves into debt and with the addition of late fees by some providers this debt will increase. In one scenario a CDFI saw a customer with 30 BNPL products at one time and definitely not with the affordability to repay them. Other alternatives include catalogues and 0% in-store finance. Only having access to credit for goods and not cash can mean people end up buying more expensive alternatives than they would if they had the choice of where to spend the cash.

But what happens if you really need access to the cash and not the product? This is where people can get into all sorts of financial trouble and start to ‘flip’ the goods they have on credit and sell them to get cash. Not illegal, but the real cost of credit for this access to cash suddenly gets extremely high. I have been unable to find much formal research of this area but seen it mentioned online in forums and social media. We do need a much better understanding of what lengths people are forced to go to access cash when it’s not available. 

We all know that some of the practices in the small cash loans market were not acceptable and did lead to poor customer outcomes, but we now have a demand that outstrips supply and an increase in people going to loan sharks, flipping goods for cash or selling their own possessions to pawnbrokers. I believe that there are no bad products, as the regulation managed to weed them out, but there remains  bad practices where the focus is not on the best customer outcome. We need to find ways to attract new entrants to the market who will close this gap of access to cash, lending in a responsible way with the customer at the forefront of their mind. 

Market supply of small cash loans 

Where has the supply gone? In 2013 there was £3.7bn in outstanding loans to home credit and high cost lenders, the main small cash loan providers. Roll forward to 2021 and there was only £0.5bn outstanding to home credit and high cost lenders. There’s even less now. Much of this reduction was due to reduced supply as payday lenders and home credit providers exited the market due to new regulation, the move to digitisation and high volume of complaints making their business models unsustainable.  

There are now very little face-to-face lending options offering loans below £1,000 with most lenders only offering online options.

Interestingly, it’s quite hard to tell how many lenders there are as many of the loan companies now use aggregators to reach the market rather than selling to customers directly. This faceless lending means that price is the main way that customers will choose their loan options rather than any other feature of the product or brand awareness. The direct online lenders that are left offering small cash loans tend to be very high cost (above 500% APR for lack of a better way to describe this). 

It is not an attractive market for new entrants to come into due to the moral hazard on charging the correct cost of delivery, high risk from claims management companies in the current environment and very little likelihood of making money with the high costs of technology and customers needing flexibility and forbearance in a volatile economic environment. The demise of home credit and direct online lenders over the last few years has left a large gap in the market for small cash loans and no commercial appetite to fill this.  If new commercial entrants cannot be attracted into the market to offer small cash loans we will continue to see a gap between supply and demand and this could lead people to going down desperate routes to access the cash they need.