Context

One aspect of the Financial Conduct Authority’s (FCA’s) work includes looking at the conduct of individual firms and how the retail and wholesale markets are evolving. As part of the FCA’s work supervising retail lending firms, they identified that relending in the high cost credit market is prevalent. Given the characteristics of these customers the potential for financial harm is high. Six products are of particular interest in this research, including:

• High cost short term credit (‘payday loans’);
• Home collected credit (HCC);
• Rent to own (RTO)
• Guarantor loans;
• Logbook loans;
• High cost personal loans.

New research was needed to understand consumers’ experiences, motivations and characteristics around repeat borrowing. The research would help to inform the FCA’s analysis of the impacts of relending alongside other evidence provided by firms.

The study

This 2020 report from PwC Consulting aims to provide a deeper understanding of repeat borrowing in the high cost credit market. The specific aims were to establish:

• Reasons for repeat borrowing;
• The extent to which consumers’ decisions to reborrow were being driven by the consumers themselves or by lender activity such as marketing;
• Whether consumers were being harmed by reborrowing, and if so how.

The research was carried out between July and September 2017. A number of firms representing a range of products in the high cost credit market were approached by the Financial Conduct Authority. The firms were asked to provide a list of customers who were repeat borrowers (those who had reborrowed in the past 12 months), and a representative sample of these reborrowers was passed on to PwC.

The first stage of the research involved 36 in-depth interviews with reborrowers – six for each product type. This was supplemented with six shorter interviews with guarantors. All participants were asked to complete a two-week money diary in the two weeks preceding their interview. The qualitative research took place across all four nations in urban, suburban and rural locations.

The second, quantitative stage involved a mixture of telephone and online surveys. The surveys were conducted with a representative sample of reborrowers from across each of the six product groups. In total, 821 surveys were completed.

Key findings

• Payday, guarantor and logbook loan customers were more likely to be male than female.
  • For example, 70% of consumers with logbook loans were men.
• HCC and RTO customers were more likely to be female, with women accounting for two-thirds (65%) of all RTO loans.
• Guarantor loans tended to be used more by younger people (48% of loans went to those aged under 35); while HCC customers had the oldest age profile.
• Those with payday, guarantor and high cost loans were more likely to be on higher incomes.
• Overall in the interviews customers described themselves as reluctant borrowers, using credit as a last resort. However, there were some exceptions to this, with payday loan customers in particular appearing to be ‘survival borrowers’, using the loans to get by. Additionally, some of the HCC borrowers were ‘lifestyle borrowers’, using the loans to get things they wanted as well as needed.
• The interviews revealed that few borrowers aspired to become completely debt free, often driven by a sense of resignation. Their aim was to stay on top of their repayments and feel under less pressure financially.
• Overwhelmingly, both the interviews and the quantitative research showed that people reborrowed as a last resort, and it was seen as the only option.
• Although there was some evidence of providers initiating conversations about further borrowing, most customers felt that this was not a major factor in their decision making.
• Convenience, speed and the knowledge that they were likely to be accepted were also drivers in reborrowing.
• Almost half (46%) of both HCC and payday loans customers said that they tended to borrow money when the provider told them it was available. This compared to a quarter of those with RTO and guarantor products (24% and 25% respectively).
• While many customers regretted their reborrowing, many thought they would continue to do so because they didn’t see their finances improving or were stuck in the ‘cycle’.
• Of the six products covered in the research, payday loans emerged as having higher levels of negative impact on reborrowers relative to other products, compared to HCC which had the lowest impact.

Points to consider

• While little information on the methodology is included the analysis appears to be based on comprehensive research, using mainly descriptive statistics from high-level administrative data.
• This report is of significant interest to politicians, policymakers and other stakeholders who are interested in understanding levels of reborrowing among consumers of high cost credit.
• The findings are situated in a UK context, though some of the learnings may be transferrable to countries with similar financial regulatory environments.