According to data from peer-to-peer lending platform Plend, the number of people who feel excluded from the UK’s financial services and credit market has risen by 40% as lenders reduce their risk appetite amid a cost of living crisis.
Plend surveyed 4,500 people, weighted to be nationally representative, and found that 28% of respondents feel locked out. What’s more, 40% of those surveyed had loan applications rejected in the past two years.
The UK has seen rates of inflation that have been stubbornly high—significantly higher than in the United States. The yearly-adjusted rate of inflation for Feb. 2022 was 10.4%. To combat inflation, the Bank of England has raised interest rates, which make it more expensive to lend money.
Banks use a variety of criteria to decide who to give loans to, including credit history, income, employment status, and debt-to-income ratio. In a tight credit market, lenders become more risk-averse and raise their lending standards, making it harder for individuals who are perceived as risky borrowers to get loans.
Higher interest rates also increase the cost of borrowing, making it less attractive for banks to lend to certain groups of borrowers. The decreased availability of credit to low-income people and minority groups exacerbates inequality, as these individuals may have less access to alternative sources of funding, such as investments or family loans.
In a recent Financial Times article, Plend’s CEO Robert Pasco, laments the reduced access to financial services. But unless inflation decreases, there is likely no end in sight to banks tightening their lending requirements.
Ultimately, decreases in lending available are inevitable with higher interest rates, and until inflation is brought under control, lenders will likely continue to tighten their lending requirements.