“End high cost credit!” But what should replace it?
By Grace Brownfield, Senior Public Policy Advocate
Last week, we joined around 15 organisations in a new End High Cost Credit Alliance brokered by Hollywood actor Michael Sheen, who’s using his celebrity status to call for a high profile ‘national conversation’ about the use of credit.
Even the FCA’s talking about the need for more ‘mid-cost’ credit to help those on lower incomes. This is all good news. But what does it mean in practice? What kind of credit do people on low incomes actually need?
The obvious point to make is that there isn’t a ‘one size fits all’ solution. But, by looking at a level of minimum income that people need to live to a decent standard, and considering the different groups with incomes below this, we can understand what sort of ‘affordable credit’ might be feasible and sustainable for different lower income groups.
The problem of high cost credit
The issues with high cost credit, such as payday loans, home credit or rent-to-own stores, are well known. Our previous research [PDF] shows how the use of high cost credit puts people at significant risk of financial difficulty — and only last week the Royal Society for Public Health (RSPH) warned about the harm that high cost credit can cause to people’s health, as well as their finances.
Yet currently people often have no choice but to turn to high cost, risky forms of credit
We estimate that last year, 1.4 million people used high cost credit to pay for essential household costs, like energy bills, children’s clothes and essential goods such as fridges or washing machines.
This is up from 1.1 million people in 2016. This can leave people paying over the odds just to cover these costs, and puts pressure on already stretched household budgets.
The scale of the problem is clear. But what’s the solution? Much has been made of the need for affordable alternatives to high cost credit, and we certainly agree.
Credit unions and responsible finance lenders are, rightly, held up as an important part of this. However, as our new analysis shows, they can’t solve the problem alone.
What type of credit can lower income households afford?
Using the Joseph Rowntree Foundation’s (JRF) Minimum Income Standard (MIS), we looked at who is living on a low income and what sustainable borrowing for them would look like. The MIS gives a figure for the amount of income households need for them to reach a decent standard of living.
In 2017, this is around £17,900 for a single person and £20,400 for someone in a couple with two children.
Using the MIS, we identified three main lower income groups:
- Those living just below the Minimum Income Standard
Approximately 8 million people - Those living on 75% of the Minimum Income Standard
Approximately 11 million people - Those on significantly low incomes and classed as being in ‘destitution’
Approximately 1.25 million people
[Sources: JRF, Households below a minimum income standard 2008–09–2014/15. And JRF, Destitution in the UK]
While existing sources such as credit unions or community lenders are likely to be suitable for the first of these groups, those on incomes of 75% of the MIS or less are unlikely to meet the affordability checks for these products, and may struggle to repay even a low interest loan.
These households need a different alternative, perhaps in the form of no-interest loans, which can be repaid over a longer period and have flexibility on repayments, to reflect the budgets of those with low and insecure incomes.
Given the FCA’s interest in the mid-cost credit market, as well as its strong views about financial services culture, we see the regulator as having a significant role in brokering debate, along with government, about how this could extend towards no-cost where appropriate.
Finally, for those classed as being in destitution, meaning they lack two or more of six essentials (e.g. shelter, food etc.) because they can’t afford them, any form of borrowing is likely to be inappropriate.
They’d struggle to repay even a no-interest loan and are likely to need emergency, priority support in the form of grants or other support services.
Local welfare schemes can help here, but evidence increasingly shows demand for them outstrips supply. What this group of people really need is increased and more secure funding for local welfare provision, so that people in destitution can access crisis grants they don’t have to repay.
A call to action
To go back to the words of Michael Sheen, we agree that a ‘national conversation’ is much needed when it comes to affordable credit. But that conversation must recognise the varied needs of those we’re trying to help.
While we must undoubtedly keep expanding the provision of credit unions and similar, we need to look beyond this too.
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.
To read more on what sort of credit can help low income households, download the full report.
