Needs of lower income borrowers
The needs of borrowers on lower incomes
Lower income borrowers often look for specific things when seeking credit and the features they prioritise may differ from what higher income consumers would consider most important. A 2005 report commissioned by the Joseph Rowntree Foundation, entitled ‘Affordable credit for low-income households’1, identified what people on lower incomes look for when they borrow. Their key needs include:
- Affordable repayments – borrowers want small, affordable weekly repayments that can easily be accommodated in their household budget. They may want to make smaller but more frequent payments, typically weekly, because this fits in with their existing weekly budgeting pattern.
- A suitable, flexible repayment method – the ideal method would be one which is regular and convenient but which can also offer flexibility. It would make it as easy as possible for customers to pay when they could but wouldn't penalise them when they couldn't.
- Transparency – with the total cost fixed and clear upfront. This means no hidden charges emerging after the credit agreement is signed, typically in the form of late or missed payment penalties.
- Access – quick, convenient access without an overly long or intrusive application process.
Unless a credit provider can match these requirements the credit offered will not meet the needs of low income borrowers. Home credit can match all of the above requirements of low income borrowers, specifically:
- small, affordable payments are collected weekly from the customer's home;
- the cost of borrowing is fixed and all-in. There are no extra charges for missed or late payment. Every pound repaid reduces the total amount owed by a pound;
- a home credit customer knows at the outset what the APR is, how much the weekly payments will be and what the total cost of the service will be.
‘Affordable Credit for low-income households’ goes on to outline why lending to those on lower incomes will differ from lending to those on average or higher than average incomes.
- There is a higher risk that lower income borrowers will default on payments (because their circumstances are much more likely to change).
- Borrowers prefer to repay weekly and often prefer to repay in cash.
- Borrowers want to borrow relatively small amounts over short periods of time.
The implications for those supplying credit to those on low incomes are:
- "In the credit market high risk means high cost, which translates either into high charges for the customer [in the commercial sector] or high subsidies [in the not-for-profit sector].
- The highest costs are incurred in the provision of credit to people on the lowest incomes partly because these borrowers represent a high risk and partly because the fixed costs of lending are high relative to the typical loan size."