A third (32%) of lenders have seen an increase in borrower defaults over the last 12 months, according to new research from AI-powered transaction analytics firm, Fuse.

In a new report, Fuse has found that consumers are increasingly reliant on credit amidst rising living costs – with young people struggling the most. Over four in ten (43%) of 18-34-year-olds are reliant on credit to pay for everyday expenses and a similar number (42%) will need to borrow money in the next six months to get by.

The research also shows that a third (31%) of borrowers have been rejected by lenders due to failing affordability checks in the last 12 months. Two-thirds (65%) of lenders warn that this rejection rate has increased compared to the previous year.

The rising proportion of rejected applications has sparked concern that these potentially vulnerable borrowers may be forced to turn to higher-cost or illegal credit options – recent research from Fair4All Finance revealed that over three million people have borrowed from illegal lenders in the last three years.

It is vital that mainstream lenders are able to accurately evaluate the financial situation of prospective borrowers to ensure they have access to affordable credit options during the cost of living crisis – a time where they are likely to be most in need. Without this, many of the UK’s vulnerable borrowers could be at increased risk of longer-term debt.

With the Financial Conduct Authority’s (FCA) new Consumer Duty rules becoming effective on 31^st July, lenders are required to provide consumers with higher and clearer standards of support and protection to promote good outcomes.

Lenders must ensure they are adequately equipped to deliver the support that consumers so desperately need. However, over half of lenders (55%) admit to not being ready for the incoming rules and two-thirds of lenders (67%) claim there hasn’t been enough support from the FCA regarding the implementation of the new rules.

A key aspect of providing support to borrowers is to leverage more effective insights into borrower vulnerability and affordability, allowing lenders to identify those at financial risk, at a much earlier stage.

Products, such as Fuse’s Health Signals, have been designed to support lenders meet the upcoming Consumer Duty requirements and provide risk and compliance teams with greater insights into areas of vulnerability as well as predict arrears risk and monitor the impact of financial products on their customers.

Sho Sugihara, CEO and Co-Founder of Fuse, comments: “It is hugely concerning that defaults are spiking - with the cost of living showing little signs of easing, the situation seems set to only worsen for many. Reliance on credit is on the rise and there are potentially millions across the UK who are at real risk of falling into long-term debt and being excluded from mainstream credit options.

“In order to more accurately analyse borrower affordability and vulnerability, lenders must ensure that they are fully utilising a wider range of insights which can not only protect borrowers from defaulting but also unlock access to personalised and more appropriate credit products.

“The new Consumer Duty rules will require many lenders to consider new approaches to support borrowers and take a more outcomes-based view throughout the affordability process. However, the Consumer Duty is likely to just be the tip of the iceberg - the financial system is in immediate need of an overhaul to create a fairer, more inclusive model with vulnerable borrowers at its heart. In order for this to happen, lenders need to utilise insights into borrower vulnerability to help them identify points of need before it is too late.”  

The Health Signals platform is highly-scalable and easily integrated with an organisation’s current systems. The algorithms have been trained on over 400 million proprietary data points collected specifically for retail lending, including transactions, lending decisions, and credit reports.