As the cost-of-living crisis pushes record numbers of people to the financial edge, with many relying on loans, overdrafts or credit, Moneyhub Decisioning warns that many Brits may be at risk of falling into a spiral of missed payments and loan defaults.

Of those who have experienced difficulties, a tenth (10%) said they believe the product they were on was not the most suitable for their circumstances. 

A further 18% admitted they were unsure whether the product they were on was suitable for their financial situation. Asked why their product was not suitable, over a third (35%) said they felt the bank or lender was more concerned about the selling of the product than the product's suitability for their individual needs. In these instances, being on an unsuitable product has dire consequences for all parties: for the customer, unable to keep to the repayment terms, and the lender, as more customers default on their loans. 

Of the 10% claiming their product was unsuitable, 33% said their income was not sufficient to afford their repayments, 29% said their income could not account for interest rate rises, and 16% said they had a history of defaults. However, detecting these issues can be challenging for lenders relying on traditional credit scoring or the borrower’s own knowledge of their financial situation. To highlight this, over a quarter (27%) of Brits said they thought they’d be offered more suitable products from a bank or lender if their finances were better understood by the organisation.

Consumer Duty dictates that financial providers have a responsibility to ensure products and services represent fair value to customers, and are designed to meet a customer’s needs. If customers were offered Open Finance Affordability checks up front, alongside traditional credit checks, lenders would have a much more holistic view of an applicant’s finances, meaning that customers could be matched more closely with the products most suitable for their financial situation. These initial checks would ensure customers are only offered products they truly have the ability to repay. Enabling customers to regain their financial wellness, these checks also support Consumer Duty compliance, providing a win-win situation for customers and lenders alike.

Indeed, Moneyhub’s Decisioning clients have experienced up to 50% less customers going into payment defaults and bad debt by using Open Banking Affordability checks. 

Open Finance technology provides a solution for better, more holistic affordability checks. With the customer’s consent, Open Finance-powered platforms can help lenders to understand the entirety of their customers’ finances. This allows the lender not only to spot any red flags, but also to offer better products that would benefit the customer and reduce their risk for harm. 

With 34% of Brits openly agreeing that they would be happy to share financial information securely with a bank or lender, customers clearly recognise the benefits this can have for them. 

Suzanne Homewood, Managing Director at Moneyhub, says: “The pressures and financial strains of the current cost-of-living crisis is understandably causing more people to turn to borrowing to make ends meet. However, whilst these products may help in the short-term, they are by no means suitable without detailed understanding and evaluation of their ability to repay.

“Too often, the lender doesn’t have access to a full picture of their customer’s current financial situation, and may use outdated bias and buffers to make a decision. This can and does lead to customers being unable to afford repayments, particularly as interest rates continue to rise.  

“Open Finance powered Affordability and Decisioning tools can help lenders and banks assess the needs and appropriateness of products and services for customers through a detailed view of their real-time financial position.

“Our research shows that consumers expect the companies they approach to be able to match them with the right product. And with more people finding themselves in a financially vulnerable situation and applying for a loan for the first time, the onus is on the lender to take all reasonable steps to assess suitability and affordability, which in turn mitigates risk of delinquency - and helps bolster Consumer Duty compliance in the process.”

*Source: Moneyhub client base