Reborrowing is norm for high cost credit customers

7 August 2020   By Dr Lucy Brown, Editor

New research shows how customer debt levels increase as they borrow more money from high cost lenders and reborrowing becomes default option.

The most common reason for reborrowing was that it was a customer's only option, and familiarity with a lender helps promotes them taking on more debt.

Interviews also showed several behaviour biases including reborrowing becoming a social norm and short-term thinking taking over from more long-term considerations.

The Financial Conduct Authority (FCA) commissioned the review to help understand what impact relending has on customers.

money in back pocket
Credit: Barabas Csaba/


Researchers looked at why customers decided to reborrow from a lender through interviews with repeat borrowers across six different credit products: payday loans, logbook loans, high cost personal loans, guarantor loans, rent to own and home collected credit.

The most common reason customers said they reborrowed was because it was their only option, with only home collected credit customers saying this wasn't the case for them.

Other factors encouraging customers to reborrow included:

  • They'd borrowed before
  • They knew they would be accepted
  • It was convenient
  • It was fast

These drivers of familiarity were perceived by the customers to be independent of the provider, i.e. customers did not think they were being encouraged by their provider to reborrow.

Yet 46% of payday loan and home collected credit customers said they tended to borrow when their provider said there was money available, along with 43% of high cost personal loan customers.

Behavioural biases

Researchers also examined the behaviour biases borrowers exhibited during their interviews, identifying four distinct biases:

  • Optimism - Customer is overly optimistic about their situation staying the same or improving and not considering the possibility of unexpected costs or loss of income
  • Short term thinking - Customer focuses on weekly amounts payable rather than total amount to be repaid
  • Framing - Customers think of top-ups in isolation to overall loan amount so extra amount per week feels manageable
  • Social norms - Customers' family/friends play huge role in deciding to reborrow

Interviews noted borrowers expressed regret about their reborrowing, but the regret was more generalised around their financial situation as a whole rather than regret at using a specific product.

Even when customers expressed regret about reborrowing, many said they would continue to do so because they didn't see their personal circumstances would change or they thought it would be difficult to break the cycle.

High cost credit sector

Although this review was due to be published in March, it was delayed as the FCA and lenders focused on financial hardship caused by the coronavirus pandemic.

Now, however, the FCA has made clear that it expects firms to consider the effects of reborrowing and other actions on their customers as lending restarts.

Their comments follow a spate of collapses in the sector due to longstanding complaint issues. Several lenders including Peachy and Uploan have disappeared from the payday lending market in the UK this year.

Sunny were the most recent to fold in July as the number of complaints about affordability checks and other issues reached unsustainable levels.

The UK's biggest rent-to-own company BrightHouse collapsed at the beginning of the coronavirus crisis in March as the closure of retail locations coupled with high complaint levels caused the business to fold.

Action from the FCA in recent years has targeted affordability checks and mis-selling, leaving many lenders with high levels of customers complaints to deal with.

Just last month Shelby Finance were forced to write off £500,000 in loans after failing to issue borrowing statements to over 15,000 customers.

Payday loans and other high cost credit options are sometimes not the only choices available for people struggling with debt. Read this guide to find out more.

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