Overspending and non-performing loans – is the wave about to hit?
High interest rates and soaring inflation, alongside real wages failing to keep pace with rising costs, have left some struggling to make ends meet. But have we seen the worst of it, or are non-performing loans about to escalate?
Consumers have had a torrid time in the last few years, with the Covid pandemic, geopolitical uncertainty, high inflation and a cost-of-living crisis. While many have managed to stay afloat, collections teams are preparing for non-performing loans to increase significantly.
Intrum’s latest European Consumer Payment Report (ECPR) surveyed 20,000 European consumers and found that many have reached the point where clever budgeting and cutting back on day-to-day expenses is no longer enough to meet the shortfall in their monthly budgets.
More than a third of those surveyed (35%) have failed to pay at least one bill on time in the last 12 months – the highest proportion since 2019. Four in ten who missed a bill (42%) said this is a regular occurrence for them.
While some managed to save money during Covid, with fewer opportunities to spend money on leisure and travel, savings have been wiped out by the cost-of-living crisis. Of those surveyed, 20% have no savings at all and a further 17% have less than one month’s income to fall back on.
Meanwhile, a staggering 76% of consumers are either breaking even or overspending each month, meaning only a quarter of Europeans are comfortable with their finances. Of the 24% overspending, the average amount they are exceeding their budget by is €232 – adding up to €2,784 in a 12-month period.
This level of overspending is not sustainable for households. What may seem like small amounts can quickly add to a big debt problem. Many of these customers are finding themselves struggling with problem debt for the first time, so collections teams can expect an influx of new cases to handle with people who don’t understand the process and will need extra time and support.
Impact of inflation yet to fully hit
Inflation is a key driver of consumer financial distress, with the European Commission predicting that it will average 5.6% in the eurozone over 2023. However, prices have been rising much more quickly than that. Inflation is expected to peak at 8.6% in the euro area and 10.0% in the wider EU, while the UK has seen even higher rates.
The policy response has been to raise interest rates, which has increased the cost of borrowing for consumers hoping to bridge the gap with credit. Many consumers are pessimistic about this changing in the near future. More than half of those surveyed (57%) say they don’t think the actions taken by the central bank in their country will be effective.
In truth, the worst may be yet to come, with many European householders on fixed mortgage rates agreed in better times that will be coming to an end soon. This will land consumers used to the low interest rate environment of the past years with far higher mortgage costs and may tip households over the edge.
Non-performing loans set to rise
The increase in stage two, underperforming loans across Europe is a strong indication that further impairment is in the pipeline. Lenders and their partners are gearing up to tackle higher levels of default as consumers are forced to miss payments.
We haven’t seen a significant rise in unemployment. Consumers still have jobs and income but have found themselves blindsided by the rapid increase in costs. Many simply don’t have enough money to pay their bills and are having to make difficult decisions about which to prioritise.
It’s important that lenders have capacity in place to deal with rising levels of financially distressed consumers and understand that the type of consumer coming through the collections process may be different to those in the past.
As well as those on low incomes, we will see an increase in those who have not been in financial difficulty before – these consumers may be on high incomes, with bigger financial commitments. Educating them on the process and offering the right support is important.
What can businesses do to protect themselves?
Credit risk
Ensure there are robust processes in place to check the credit status of customers that are monitored and updated on a regular basis. Circumstances can change quickly so a credit check on acquisition may not be enough to pick up problems.
Talk to your customers
Treat early warning indicators, such as bills being paid later than usual, seriously. Talk to your customers and consider providing extra advice and communication so they feel comfortable talking to you if there are payment problems.
Offer flexibility
Consumers say they value flexibility in payments: 47% said they are more likely to spend money with businesses that offer flexible payment terms when they make a purchase, such as partial payments, multiple payment methods and flexible due dates. Two-thirds (66%) said they think socially responsible businesses should offer these methods during a downturn.
Educate customers
Now, more than ever, financial education is crucial. Intrum’s survey shows that financial literacy has a huge impact when it comes to staying out of difficulty. Only 31% of those with a good understanding of financial concepts defaulted on a bill in the last 12 months compared with 46% of those with poor understanding.
Know when to stop
While forbearance is important, allowing customers to rack up bigger debts that they have little hope of paying is not in their best interests. In these cases, defaulting earlier and supporting customers with a payment plan or signposting holistic debt advice may be the best option.
