Stella Creasy: Paying the price of high-cost credit
Published by Julien Tremblin for 24dash.com in Housing and also in Bill Payments
Stella Creasy: Paying the price of high-cost credit
The high-cost credit sector, made up of payday lenders, home credit providers and hire purchase agreements, is growing rapidly and increasingly causing many social housing tenants to get into severe debt problems. In a 24dash exclusive, Labour MP for Walthamstow Stella Creasy explains why the introduction of tighter regulation into this market is absolutely essential to protect vulnerable consumers.
Access to credit is a crucial element of a growing economy. A fair, stable credit system allows people to plan ahead and shape their own futures. Yet in today’s economic climate, as the cost of living soars, wages are frozen and unemployment rises, more and more people are using credit just to make ends meet.
Economic projections by the Office of Budget Responsibility are based on a massive increase in personal debt from £1.5 trillion now to £2.1 trillion in 2016. As the Government offloads the burden of public debt onto households, a new inequality is arising between those who are able to access affordable credit and those who cannot.
Research by the Human City Institute and Compass adds to a growing body of evidence demonstrating a split between those who can make use of credit options that help them invest in their future, and those who are forced into self-defeating cycles of expensive debt. This new dividing line has severe implications not only for the well-being of those who find themselves on the wrong side of it, but for the future health of our economy and society as a whole.
The research finds that one fifth of low earners, of whom there are 14 million in the UK, say their debt burden is heavy. More than one third have no savings at all and one fifth have less than £1,500 in savings. Social housing tenants constitute around six in 10 of financially excluded households, of whom one in six have no bank account, eight in 10 have no savings and nine in 10 have no insurance cover. Clearly, debt problems are having a withering impact on lower-income households and their ability to plan for the future.
This credit inequality is most obvious in British consumers’ use of the high-cost credit sector. With lower-income households often excluded from the mainstream credit market, they are increasingly turning to high-cost credit providers such as payday and doorstep lenders whose business models often trap people in cycles of expensive interest payments. For the 46% of British people who are struggling to make it to payday, the exorbitant cost of such credit creates problems as 10% say high-cost credit is worsening their debts.
The high-cost credit industry itself is growing at a terrifying rate. Payday lending alone doubled in value between 2008 and 2010. Dollar Financial, a US-based lender which owns The Money Shop in the UK, has expanded from just one store in the UK in 1992, which dealt primarily with cheque cashing, to 273 stores and 64 franchises across the UK by 2009. Now it plans to quadruple the number of stores it operates on Britain’s high street.
Wonga.com, an online start-up whose representative APR is an astonishing 4,214%, has just announced an annual gross profit of £35.5m, and is ploughing further capital investment into its business. With little sign of the Government acting quickly to regulate this industry and with the economic indicators worsening by the day, “problem lending” is only going to get worse.
In tandem with this explosion in the high-cost credit industry comes a sickening increase in debt problems associated with it. New research from Citizens Advice has found that the numbers of people coming to them with debt problems as a result of taking out high-cost credit has quadrupled in the last two years.
In addition those with high-cost credit problems are more likely to be young and financially excluded than those who take out other types of credit. Despite the industry’s claims that they only lend to those who are able to repay, Citizens Advice have found that 34% of their high-cost credit clients are unemployed. There can be no clearer indication that this industry is exploiting people who cannot get credit from anywhere else. It’s high time that the Government recognises the urgency of the problem and introduces powers to cap the cost of credit.
Social tenants are looking to housing associations for help and many provide a range of financial inclusion services including assistance with opening bank accounts, community development finance initiatives, credit unions, financial inclusion awareness and literacy training, fuel poverty advice, household insurance schemes, PayPoint services, rent deposit schemes, white goods and furniture re-use as well as debt and money advice.
Yet such services cannot hope to solve problems associated with financial exclusion and high-cost credit on their own. Nor will the credit union movement be able to grow quickly enough to provide lower-income consumers with sufficient credit provision – the Government’s preferred solution. It has become increasingly clear that doing nothing is not an option: the Government must put in place stricter regulations on the charges high-cost lenders levy, and ensure that more people have access to affordable credit.
This article originally appeared in the November edition of 24housing magazine.