High Cost Lending: Part of the problem not part of the solution

DOOD logoAttending a conference on Tackling Britain’s high cost credit problem today, I felt like I’d been here many times before over the past 14 years – only the problems just keep getting worse.

In the fourteen years since we launched Debt on our Doorstep – the campaign for fair finance – the basic injustice that those on the lowest incomes pay the most to access credit hasn’t gone away.  In spite of countless Government reviews of the ‘high cost credit’ sector, the scale and urgency of the problem is greater than ever.

Whilst the cost of mainstream credit (for those who can access it) is at record low levels, for those reliant on ‘high cost’ lending, the costs are greater than ever.  As Damon Gibbons reveals in a joint Church Action on Poverty and Centre for Responsible Credit report launched to coincide with the conference, the cost of borrowing from the likes of Provident Financial – Britain’s biggest doorstep lending – have actually increased in the past five years.   Meanwhile, there has been an explosion in payday lending, frequently at rates in excess of 1,200% apr.

The high cost credit crisis is now no longer restricted to those on the lowest incomes.  Peter Tutton revealed that the debt charity Step Change has seen a mushrooming of consumer debt problems over the past twelve months from those in the ‘squeezed middle’:  Households, who despite being mostly in work have seen their incomes go down on average by 7 percent over the past three years.  Their debts, frequently to multiple Payday lenders (£1,600 a month) now exceed their average monthly income (£1,400 a month).  Four out of ten are below the official poverty line – but this figure rises to eight out of ten once their debts are taken into account.

With the full impact of cuts to Housing Benefit and other benefits due to come into effect in the next two months, the pressure on household finances to turn to high cost lenders simply to pay the rent and other household bills will become even greater.

Declining incomes, declining benefits, rising prices and high cost credit are all part of a toxic mix which, in part, explains the explosion in foodbanks over the past twelve months.

And yet, just at this moment of crisis in household debt, the Government is withdrawing from its own role of lender of last resort – abolishing much of the Social Fund, and looking to local authorities to step into the breach with a mishmash of local schemes – many of which are yet to be fully developed, in spite of the fact they are due to come into operation in less than five weeks time.

Amidst all the doom and gloom at the conference, there were just a few glimmers of hope:

Some high cost lenders are now accepting the case we have been making for more responsible lending practices – with Brighthouse and Buy as You View now working to reduce the cost of borrowing for their ‘better’ payers.  And Credit Union membership in the UK has now, for the first time, topped the one million mark, with £800 million in savings and £600 million out on loan.  With support from the Department for Work and Pensions, many Credit Unions are now making great strides towards offering a competitive range of products and services – but the coverage remains extremely patchy.

Payday lenderAnd some see positive signs that the new Financial Capability Authority (which is due to replace the Financial Services Authority later this year) will take a more robust line in terms of regulating high cost lending – and not least in terms of using its new power to cap the cost of Payday lending.

But in general terms, there was little cause for optimism amongst those assembled at the conference today.  And far fewer grounds for optimism, I suspect, in the streets and neighbourhoods where it really matters.

Is it possible to reduce the ‘excess cost’ of finance, food, fuel and a whole host of other essential household goods and services, and thereby ease pressures on family budgets?  Is it possible, in short, to make markets work for the poorest?

For families already struggling to make ends meet, borrowing money at high (not to say extortionate) cost, serves only to make matters worse.  That was true back in 1999, and it is all the more so today.

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