Payment holiday takers trapped by lending rules amid fears of second wave

Britons paid off almost £16bn in personal debt as the Covid crisis raged, dramatically shoring up their financial affairs in the process.

But while it has been great news for the health of the nation’s wallets – at least according to the headline figures – lenders are keen to get us back in the red and earning them money, especially the high-cost outfits now stalking the UK’s consumers.

With signs that new borrowing is starting to tick back up, albeit slowly, the Financial Conduct Authority (FCA) has fired a warning short across the bows of those trying to entice us back into crippling debt after months of determined, collective action to free ourselves from it.

But this is a crisis of two halves, and there are plenty more Britons for whom debt never went away. It got worse as people fell through the support net, often turning to or falling further into the clutches of high-cost lenders like payday or doorstep loan companies, in a bid to cover everyday bills or other debts.

More than one in 10 Britons feel they are now living “on the breadline”, rising to a quarter for those on furlough, according to data from financial think tank Nesta Challenges. A fifth of Britons are already relying on credit to get by.

And those who never got the magic money break are now on the brink of even greater problems as the financial assistance gets scaled back.

“The regulator is clearly worried about debt companies using misleading marketing and pushy tactics to keep customers in high-cost debt,” warns Laura Suter, personal finance analyst at AJ Bell, commenting on the FCA’s launch of a review into the heavy-handed tactics of high-cost lenders.

“With debt levels set to spiral amid the end of the furlough scheme and a spike in unemployment, the FCA has warned that some high-cost lenders are acting irresponsibly by continuing to lend money to those already in debt who have no way out.”

Any crackdown on these practices would be good news for consumers at a time when many find themselves in spiralling debt. This is particularly the case as the Covid-19 measures introduced by the regulator to ease the burden of debt, such as payment holidays or reductions in interest rates, start to be unwound and people face hefty bills for their borrowing, adds Ms Suter.

“But those in debt should be offered help to solve their underlying financial difficulties, rather than just being denied more credit, which risks pushing them towards unscrupulous lenders. Consumers struggling to repay their debt and those who are continually borrowing should be offered debt advice, a plan to pay off their borrowing and, crucially, cheaper forms of borrowing while they do it,” Ms Suter says.

Right now, though, that’s easier said than done. Rearranging finance is proving increasingly difficult as payment holidays, furlough and shut-up businesses blast enormous holes in credit worthiness.

Most people took payment holidays as a precaution against the economic fallout of Covid rather than as a result of an immediate financial hole.

Others, such as small business owners, saw their organisations’ incomes drop to zero temporarily before returning, mercifully, to pre-Covid levels.

In other words, their fundamental financial circumstances don’t currently present a greater risk to lenders.

Their recent records suggest otherwise on paper, though, and the result is a growing number of people being financially trapped as lenders turn new borrowers down and refuse to renegotiate existing arrangements. That’s despite assurances from the business secretary, Alok Sharma, only last month that a payment holiday wouldn’t affect consumers’ credit scores.

Whether they’ve missed payments because the pandemic has blindsided them, prematurely taken payment holidays or fallen foul of lending assessments, the result is that millions of people could now be paying through the nose for decades to come because lenders have decided they’re financially unreliable.

The worst affected could face up to £2,690 a year in higher levels of interest, warns money site Credit Karma UK, with the extra costs still coming in years after the Covid crisis passes.

Over a lifetime, a poor credit score could result in extra costs totalling £129,000.

Meanwhile, with 20 per cent of households reporting they won’t financially recover from the first Covid peak this year, more than a third of UK consumers are “terrified” of the impact of a second peak, according to Credit Karma UK.

And nearly a third of people across the UK are already preparing financially for a second lockdown and almost a quarter are actively saving for another full body hit from Covid-19.