Unravelling the spiral of debt

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Today Actor Michael Sheen launches the End High Cost Credit Alliance, a movement of people and organisations committed to ending the scourge of high cost credit, and we are thrilled to have become a member. Michael says

“People need a fair, affordable credit product. Lenders need a fair, affordable credit product. Fairness for the lenders. Fairness for the people they serve. That’s what the Alliance is about”.

Most of us take access to affordable credit for granted. But for many, this isn’t straightforward. At least 4.5 million UK adults say they have been declined a financial product in the last two years. An estimated 15 per cent are over-indebted.[1] People accessing high cost credit through pay day, doorstep loans and rent to own don’t do it because they are reckless and want to fill their houses with luxury items. They access it because they have no choice, often its for a fridge because their family’s has broken and they don’t have the money to buy one upfront, or they take out a high cost loan to get school uniform for their kids or Christmas presents for the family. Then the nightmare begins, that loan ends up as a pay back of 3 times what they borrowed, and then the smiling face appears at the door and offers another loan to pay back that loan and on the cycle goes on. An online price comparison by the End Child Poverty Coalition found that families could face paying as much as £9,150 over three years for a set of ten consumer items (including a TV, sofa and washing machine), where similar items paid for upfront, could cost as little as £3,050.Why should it cost more to be poor? Is it really acceptable that vulnerable people on low incomes are being exploited by these lenders?

Credit Where Credit’s Due, our year-long mixed-methods study carried out in Wales on ‘high cost credit’ found that almost two thirds of people (65%) turned straight to such forms of credit.[2] Characterised by high-pressure sales tactics, poor affordability checks, and aggressive repayment collections these practices led to borrowers stuck with unmanageable debts. More than 70% of these customers reported that this type of borrowing was normal because they had no other choice.[3]

Other factors such as brand familiarity and loyalty, perceptions that certain lenders are not for ‘people like me’ and low financial capability impede the propensity for customers to shop around for the best deal. Buying a microwave in a rent-to-own store will mean paying 52% more than at a high street retailer.[4] This is a gross example of the poverty premium.

The impact is pernicious. Half of those taking out the loans we explored in our study in Wales reported experiencing anxiety and stress as a result of this debt. Many people told us about times when their repayments had to take precedence over activities like holidays and trips out with their children, adversely affecting their wellbeing.

Whilst there is no silver bullet which can transform this poverty premium, we are calling for appropriate steps towards expanding the affordable finance market, with new consumer credit and savings products.

There are encouraging signs of this happening across the sector. The Financial Conduct Authority’s (FCA) Project Innovate and regulatory sandbox is helping to lower the barriers to entry and innovation, particularly for smaller charitable or social enterprise operations. Our Credit Where Credit’s Due research influenced the Finance Innovation Lab’s recent Fellowship programme which supports innovations working to improve financial health and new initiatives such as the Fair by Design venture fund are helping to support the development of new markets. We also very much welcome the work of the Inclusive Economy Partnership addressing access to affordable credit as one of their areas of focus. The End High Cost Credit Alliance will also be targeting lenders themselves, policy makers and regulators as guidance, legislation and regulation are crucial to tackling this issue. But to create a more sustainable and inclusive economy, we must not underestimate the power of people; the importance of local networks and peer influence in people’s financial decision-making. Our research in Wales showed that family and friends’ recommendations is the top cited reason for choice of credit. We must therefore also engage more deeply with how people make decisions about where and when they seek credit, and trial interventions which can most effectively enable them to choose the solutions that are likely to serve them best.

 

[1] Financial Conduct Authority (2017). Understanding the financial lives of UK adults: Findings from the FCA’s Financial Lives Survey 2017. Available at: <https://www.fca.org.uk/publication/research/financial-lives-survey-2017.pdf>

[2] The Young Foundation (2016). Credit Where Credit’s Due? Available at: <https://youngfoundation.org/wp-content/uploads/2016/05/Summary-Report-VFinal3.pdf>

[3] Ibid.

[4] Based on a repaying at 69.9% annual fixed/representative apr for 156 weeks at £4.00 per week for a Samsung combination microwave costing £299.99 from a high-street store purchased outright.

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Unravelling the spiral of debt

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