Brokering through a crisis

Cerys Owen, senior credit officer at Lex Autolease discusses the important role brokers will play during the cost of living crisis

A COST of living crisis is afoot for millions of householders across the UK. The effects of rising inflation and planned tax hikes will put a further squeeze on consumer spending this year.

Russia’s invasion of Ukraine has sent global energy prices, already high following the pandemic, soaring and impacted food production for retailers and their suppliers. As a result, gas and electricity bills have increased by a record-breaking 54% due to an increase in the energy price cap, with a further increase anticipated in October.

While the 1.25% rise in National Insurance contributions and a return to the 20% rate of VAT for leisure and hospitality businesses were always forecast to take effect in April, coupled with the wider price rises, they will undoubtedly deepen the major living standards squeeze households face.

As brokers, we have a duty to our customers to make responsible lending decisions, none more so than during these times.

Affordability assessments

If a customer enters a credit agreement for a vehicle they cannot afford, this may lead to financial distress and often result in the vehicle being repossessed – impacting their immediate circumstances and their ability to secure credit in the future.

Some customers may even prioritise paying for their motor finance over other outgoings when their income isn’t enough to cover it all, which can lead to increasing debts and financial hardship.

It is therefore vital that a thorough and honest assessment of a customer’s income and expenditure is carried out to determine whether they can afford the vehicle that they’re applying for.

The fact that they might have managed credit well in the past isn’t necessarily an indicator that they will be able to repay this new credit agreement in the future.

Affordability assessments seek to use what we know about the customer’s current financial circumstances to assess this, as well as exploring any anticipated changes in financial circumstances during the term of the agreement.

By gathering accurate financial information from the customer, including their income and expenditure on the application form, you can gain a better picture of whether their financial situation is able to support their motoring plans.

The road ahead

With the cost of living squeeze expected to last well into the winter months, we must take a long term view when it comes to motor finance.

Customers must be encouraged to consider the effects of the rising costs and how likely they are to afford the vehicle in six to 12 months from now.

While the government has cut fuel duty for the first time in more than a decade, drivers continue to face a squeeze at the pumps, and perhaps a switch to an electric vehicle (EV) might be a viable option for some drivers to navigate through the road ahead, if an EV is suited to their needs.

At Lex Autolease, we are adjusting our affordability assessment accordingly with the aim of improving the protection of our customers and to continue to lend responsibly. This will mean customers will continue to be matched with the right vehicle and contract they should knowingly be able to afford going forward.