What if, loans were LINKED TO YOUR SALARY to provide you with a FAIR AND FLEXIBLE rate, more IN LINE WITH YOUR AFFORDABILITY?
Access to capital on fair and affordable terms is one of the most significant contributing factors on social mobility. From a socio-economic perspective, the consumer credit market should be the pipeline of affordable capital to the widest possible part of the UK population. Affordable credit enables UK individuals to meet their aspirations, while managing their finances effectively. Ideally this allows them to purchase goods that improve their standard of living, better their financial situation and refinance existing commitments at a lower cost or more affordable payment.
Unfortunately, the UK consumer credit market faces 3 major inadequacies in this respect:
1. Risk is disproportionately distributed between borrower and lender
Borrowers in the UK consumer loan market bear the majority of the repayment risk. This is due to the fact that they have to commit to fixed monthly payments based on only a snapshot of their financial situation at the outset of the loan. This situation is not guaranteed to remain stable over the term of the loan. Even if customers face only short-term financial difficulties this can lead to default (failure to repay a loan). It shouldn’t be solely the borrowers’ responsibility to guarantee stable payments to the lender, no matter their financial ability to do so.
It is our intention to provide a product that enables the borrower to make payments that are reflective of their financial circumstances at the point of time they make their payments. That is achieved through developing a salary linked loan, where payments are a fixed percentage of the borrower's salary. Meaning that if their salary goes up, they pay more and if their salary is going down they pay less. That reduces the likelihood of default, which would reduce credit losses for us and as a result allow us to reduce prices for our customers.
2. Insufficient customer understanding by traditional lenders
One in four UK individuals are borrowing high amounts via their credit cards, leading to high interest rates if not repaid in time. One in five UK individuals are altogether unable to access affordable finance as they have little or no credit file, limiting access to mainstream lenders, and are therefore using higher cost lenders to fulfil their financial needs. The high prices are again driving the high default rates due to inefficient pricing in the UK consumer credit market.
This is due to lenders’ traditionally limited understanding of their customers by not fully utilising the available data.
Traditional lenders tend to solely rely on credit scoring in their lending and pricing decisions. Not only does this exclude the many people in the UK that haven’t accumulated sufficient credit score data, but also excessively penalises historical ‘bad’ credit behaviour. Neither historical behaviour nor lack of data are necessarily the strongest indicators of current and future behaviour and the ability to fulfil loan commitments. The results are:
excessively expensive rates due to the lack of data, or
no access to capital at all.
When we obtain FCA authorisation to commence trading, GOCAP will make responsible lending decisions by analysing more data. On top of credit scores, we will use Open Banking to conduct in depth analysis of a customer’s affordability as well as creditworthiness. Furthermore, we will utilise advanced technology and algorithms to make use of the increased depth and breadth of data.
Creating a more complete picture based on a rigorous and comprehensive analysis of the customer’s data will allow us to create a more individualised product for UK individuals.
3. Too little concentration on the needs of an individual customer by traditional lenders
Lenders too often don’t put the customer’s needs at the centre of their ethos.
Traditional lenders tend to concentrate on improving the profitability on an individual loan basis, which often comes at the costs of the borrower. Fees for the application are often the manifestation of that strategy. We don’t believe in application fees.
We generally believe that improving the outcome for the customer restores trust in the consumer credit market and reduces credit losses for us. Therefore, improving the borrowers’ financial situation by creating an affordable loan product, that also reduces the risk borne by the borrower, is the core of our business ethos. While we might face lower profits on a per loan basis, we will face lower defaults and therefore higher recovery of the capital invested. This is captured and expressed within our lending policies.
Everyone at GOCAP contributes to the mission of creating a more individualised loan product, facilitating a unique culture which is critical to the business’s success:
Governance: creating a framework that supports our regulatory obligations
Outstanding value: having a customer-centric approach; offering loans at fair rates to support financial wellbeing
Clarity: ensuring that our customers understand our loans
Analytical excellence: learning from our customers experience and making better decisions as a result
Promises kept: when we say we will do something, our customers can be sure that it will be done
All of the above three points have negative impact on the high default rates seen in the UK consumer credit market. As default risk and the understanding of default risk is the main driver for pricing a personal loan, prices are high. High prices lead to a higher likelihood of default, which means that prices and defaults enter into a vicious spiral due to these inadequacies. The market requires a swift and determined improvement of this correlation to become the main enabler of social mobility and help UK individuals in fulfilling their financial aspirations in an affordable way.
We believe that a responsible loan should have the following features:
the price is a function of an individual’s ability to repay (linked to their salary),
the pricing is based on a more sophisticated understanding of customers (by using wider data than traditional lenders), and
the needs of customers is at the core of the lender’s ethos.
We see a gap in the market between the High Street Banks, who may well require the customer to have an existing banking relationship with them, and the next tier of lenders who typically offer loans with an APR of between 20%-40%.
We see an opportunity for a loan, of between £1,000 and £10,000, that operates a repayment model based upon a fixed percentage of a customer’s salary that is constant over the term of the loan.
Applying the above approach, if a customer was offered a loan with an APR of 13.5% at a repayment set at a fixed percentage of their income, and they received an annual salary increase of 2%, by keeping the repayments as a fixed percentage of their increasing income over a four year term the APR would rise to 15.2%.
We also believe that this should not be a one-way street, so we believe that, where a customer’s income reduces, so should their repayments, but we’d expect a cap in either direction. Fairness is key to the ethos of a responsible and caring lender.
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