Expert comment - collapse of BrightHouse
Rent-to-own credit provider BrightHouse has called in the administrators. Dr John Morris, Teaching Fellow in International Political Economy (IPE) at the University of Warwick, comments on what the collapse of BrightHouse may mean for people unable to access conventional credit but who need to make "big-ticket" purchases.
"BrightHouse provides high cost “rent-to-own” credit, typically to people on lower incomes or with poor credit history who need to replace household items but are unable to access mainstream credit.
"Rent to own" credit spreads the cost of purchasing consumer goods by allowing the borrower to lease the consumer good in exchange for a weekly or monthly payment. The customer will also have the option to purchase the good at some point during the agreement.
"Such rent-to-own products are associated with many problems such as the high cost of items, lack of price-transparency, and failure to communicate risks to potential customers.
"As when the notorious payday lender Wonga went into administration in 2018, the failure of a high-cost credit provider is widely celebrated. However, the other side to the coin is the millions of people in the UK who are unable to access mainstream finance does not miraculously disappear.
"The number of consumers per year taking out rent-to-own loans alone has remained steady at 200,000 over the past five years although, overall, the number of loans is falling.
"Consumers of rent-to-own credit are almost exclusively on low incomes and reliant to some degree on benefits. They are a huge concern because they are more likely to hold other household bill debts and other high cost products than any other category of high cost credit user. Such borrowers are likely to remain in the non- standard sector, paying more for financial goods and services, with less choice, and often exacerbating financial vulnerability and risk.
"The most important question now is what happens to these credit consumers?
"Often credit unions are held up as a silver bullet to all groups of people facing money problems. And, while credit unions are affordable lenders that encourage their members to save and offer financial advice and education, this is not viable source for people who need instant access to credit .
"One of the most attractive features of credit unions is that the interest they charge is capped at 42.6 per cent a year APR in England. However, interest rates are by their very nature discriminatory because they reflect the level of credit risk that the lender is taking on by extending credit to a customer. Simply put, credit unions cannot supply credit to the typical rent to own customer.
"Credit Unions may play a vital role in the non-standard credit system, yet expecting one piece of the affordable credit jigsaw to “fix” a complex social problem is not the answer to people relying on credit to purchase big ticket household items.
"There is an emergence of smaller firms offering much more affordable credit on household goods. Such alternative models often allow customers to acquire the item without having to pay for the full cost upfront. In contrast to rent-to buy, customers that fail to keep up with loan payments cannot have the good repossessed by the lender.
"There are clear examples of affordable credit sources in larger cities, such as Birmingham, that are successfully competing with existing providers among the key demographic groups.
"Even so, these firms currently operate on a small scale. What is needed, then, is a public commitment to, and investment in, high quality social impact reporting that can demonstrate the efficiency, effectiveness and impact of affordable lenders of household goods. This would help to garner significant investment in start-up funds to launch and establish a position to scale-up and utilise digital technology and the advances of fintech."
30 March 2020
- In this comment Dr Morris draws on and presents work carried out at Coventry University's Centre for Business in Society with Nick Henry, and in particular Sanne Velthuis's case study on Fair For You CIC funded by Responsible Finance. See the Responsible Finance website for publications on Scaling Affordable Lending.