A new report has revealed the rise in UK households dependent on high priced loans and calls on the government to provide no-interest finance to the most vulnerable
The UK has seen a significant rise in the amount of households resorting to high price loans to meet the rising costs of daily living. Research published by StepChange debt charity today, details the rise from 1.1 million households requiring high cost credit in 2016, to 1.4 million in 2017.
The report, entitled What sort of credit can help low income households? describes how many families on low incomes have had to turn to high cost credit as a “safety net” to get by, taking out a payday loan to pay for a family’s weekly food shop or using costly rent-to-own stores to buy a replacement washing machine. “Regularly relying on high cost credit puts added pressure on already tight budgets and leaves households particularly vulnerable to falling into problem debt,” said the reports authors.
The report employed a Minimum Income Standard (MIS) developed by the Joseph Rowntree Foundation to determine that 8 million people currently living in the UK are just below the MIS and around 11 million people are currently living on less than 75% of the MIS – a figure the which broadly correlates to the official poverty line of 60% of median income. The report also claimed that within those below the poverty line, “around 1.25 million people [are] on such low incomes that they are living in ‘destitution’ without the income necessary to meet basic needs on a regular basis”. Approximately 19 million people, or 30% of the population are in households with incomes below the MIS. The UK’s poorest households are also the most vulnerable to stagnating wage growth and current inflation (the amount by which money loses value) at 3.6%.
According to the report the FCA found that around 4 million people used some form of high cost credit annually, at a value of over £8 billion. By contrast the total value of lending from “responsible” finance providers in 2016-17 was £22 million to around 55,000 consumers. Compounding this dependence on “payday loans” is the fact that local government in England has had to significantly curtail their welfare schemes by around 65%.
The report asserts that the need for credit and financial services remains but that ultra-low or no cost loans would be much more pragmatic for those in, or near, poverty. The research undertaken by StepChange pointed to schemes run in Australia such as the Good Shepherd No-interest Loan Scheme, a joint initiative between the Australian Government and National Australia Bank, which was delivered through local providers.
“We must undoubtedly keep expanding the provision of credit unions and similar, but we need to look beyond this too,” wrote Grace Brownfield, senior public policy advocate at StepChange Debt Charity on the report’s launch.
“The Government and the FCA need to look creatively at working with businesses to provide low- and no-interest loans, learning from successful schemes in Australia and elsewhere, while recognising the need for the welfare system to provide better emergency support for those who need it. Such an approach could truly transform the options available to those on low incomes and break the vicious debt spiral that high cost credit all too often creates.”
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