How high-cost credit is keeping people in poverty

The high-cost credit market in the UK includes products such as payday loans, home credit, rent-to-buy retail credit and catalogues and store cards. These can all seem very appealing at first sight, but may later turn into a trap, as those who turn to them are usually the people least likely to be able to pay back the costs involved.

For millions across the UK who don’t have access to mainstream credit options thanks low or fluctuating incomes, an overdraft or the lack of an acquaintance with extra cash to borrow from, the appeal of high-cost lenders seems convenient. However, going down this road often leads to the borrower going into even further debt thanks to high interest rates and extremely tough repayment terms.

In 2015, the market was estimated at £5 billion, serving five million customers, among which are indeed the most vulnerable and financially-excluded people in society. A recent report by Citizens’ Advice, a charity committed to advice people with problems concerning money, law, consumer rights and more, pointed out that people with insecure incomes are five times more likely to turn to high-cost credit.

Single-parents aged 18 to 34 are three times more likely to have a high-cost loan – such as a payday loan, doorstep loan or pawnbroking loan – than the national average. Official figures released at the end of February showed that as many as 17,000 companies entered insolvency last year.

When faced with unexpected changes in both income and expenses, millions of Britons have been turning towards using credit to pay for their daily expenses, such as food, petrol, electricity meters and household bills. 8.3 million people in the UK indicated that keeping up with their bills and credit commitments is a ‘heavy burden’, according to figures released by The Money Advice Service in late 2017.

Changes

In May, it was announced as a result of a two-year review into the credit sector that rent-to-own stores could face a price cap like the one one enforced on high-cost lenders.

The Financial Conduct Authority (FCA) crackdown will introduce changes by April 2019 and is consulting on banning the sale of extended warranties at point of sale to save consumers up to £7.7m per year. The cap on high-cost credit, which came into force in 2015, will act as a blueprint for ways to prevent the 400,000 people paying up to £1,500 for household goods worth around £300 from being pushed into poverty.

Big Issue founder John Bird, whose Creditworthiness Assessment Bill progressed through the committee stage in the House of Lords earlier this month, has urged the FCA to cap overdraft charges to help puncture the poverty premium.

“Whether it’s extortionate levels of interest on overdrafts, or unfair doorstep, catalogue or rent-to-own borrowing, the poorest have been paying through the nose for their credit for decades,” he said.

“Though it’s good to see the rent-to-own sector now faces a price cap, it looks as if the FCA is still dragging its feet by not imposing the same restrictions on bank account overdrafts.”

The Big Issue magazine launched in 1991 in response to the growing number of rough sleepers on the streets of London, by offering people the opportunity to earn a legitimate income through selling a magazine to the public. Twenty-five years on, our vendors come from a variety of backgrounds and face the myriad of problems associated with poverty and inequality.

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