South African’s credit scores are going up after lockdown
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Short-term loan provider, Wonga, has used data gathered during their loan application process to shine some light on the impact the Covid-19 pandemic and the national lockdown has had on consumers.
By comparing loan applications prior to the commencement of lockdown with those made after the lockdown began, they were able to gather interesting insights into the changing status, behaviours and financial wellbeing of consumers.
- General decrease in short-term loan dependency; there was a 32% reduction in applicants who held more than one other short-term loan from any lender during lockdown.
- 51% of customers had a higher credit score than they did before lockdown.
- Transunion credit scores across all applications increased by an average of 25 points.
- There was an increase in applications from nurses, truck drivers, as well as people in services and management.
- There was a decrease in applications made by actors, musicians, administrators and consultants.
Number of loan applications
The commencement of lockdown saw a dramatic drop in the number of credit applications across the credit industry, with up to 40% fewer applications made in April than March according to a recent Transunion report. This is likely due to the fact that peoples’ expenditure decreased as people were confined to their homes during the level five lockdown. While Wonga experienced a similar drop in applications, and saw fewer returning customers in the first weeks of lockdown, application volumes are now beginning to approximate demand seen before the lockdown began.
“The initial drop may indicate that, due to the uncertainty associated with the lockdown, people were taking a more cautious approach to borrowing”, explains Wonga Content Manager Bryan Smith.
Short-term Loan Usage
Wonga noted that the amount of short-term loans held by each applicant dropped during the national lockdown, with a 32% reduction in applicants who held more than one short-term loan with another lender.
“Factors that contributed to this may include inactivity from other short-term loan providers during the lockdown or the fact that more people were forced to apply for loans online, instead approaching traditional walk in services. There may also have been a reduction in demand, as people either failed to qualify for loans or tried to curb their spending due to economic uncertainty”, says Smith.
Contrary to expectations, there was an improvement in Wonga applicants’ credit scores following the lockdown. Of the customers who applied for loans during lockdown, 51% had a higher score than they did at the time of their last application, before lockdown. Furthermore, credit scores across all applications increased by an average of 25 points.
According to Smith, the improvement in credit scores might be attributed to a temporary reduction in defaults brought about by payment holidays.
There was also a slight decrease of 3% in applicants’ average debt to income ratio. This could indicate that people were making an effort to settle their debts during the lockdown. However, it’s likely that payment holidays also contributed to this finding. According to TransUnion’s most recent Financial Hardship Report, 89% of consumers remain concerned over their ability to pay bills and loans.
Applicant occupations and industries
According to TransUnion’s report, 21% of South Africa consumers reported that they lost their jobs as a result of the pandemic. Wonga looked at the changes in applicant’s industry or profession, finding that there was an increase in applications made by many essential service employees. There was also a drop in applications from the industries that suffered the biggest losses as a result of lockdown.
“We saw more applications from people in the health, electricity, mining, legal services, and transportation sectors, while there was a drop in applications from the hospitality, business consultancy, cleaning, leisure, culture and publishing industries”, says Smith.
When looking at applicants’ specific professions, Wonga noted an increase in applications from nurses and truck drivers, as well as people in services and management.
“The results of this research seem to indicate that people are less inclined to apply for loans when their financial security is compromised. This might imply that people are more likely to apply for a short-term loan to manage a sudden and unforeseen expense, rather than to manage sustained financial difficulty over a longer period,” concludes Smith.