People struggling to make ends meet need somewhere safe to turn to cope with unexpected costs

Written by Adam Butler, Public Policy Manager

StepChange’s new briefing shows why alternatives to commercial borrowing like discretionary grants and affordable credit are needed at much greater scale

StepChange’s new briefing, Somewhere safe to turn, estimates 4 in 10 UK adults — almost 22 million people — would need to borrow to meet an unexpected £1,000 expense.

Moreover, 4 in 10 of those who would need to borrow — equivalent to almost 8 million people — could not actually afford to take out a loan because they are not able to make any additional repayments after meeting their essential costs. A further 3 in 10 could not afford to repay more than £50 each month, meaning they could not afford to borrow enough to cover a significant cost.

These figures reflect the deep erosion of financial resilience among UK households by rising living costs, stagnating incomes and a series of economic shocks.

The data confirms the primary driver of affordability problems is cost of living challenges: with more than 8 in 10 of those who cannot afford to borrow struggling with household bills. Almost two-thirds (64%), however, are struggling with existing credit repayments, indicating how borrowing itself can ultimately lead to risks of financial exclusion.

The challenge of ‘lumpy’ costs

Everyone has basic budgeting needs to cope with ‘lumpy’ costs: expenses that change from month to month, unpredictable costs and occasional emergencies. One way or another people must find a way to meet these expenses through income, savings or credit, or go without meeting important needs.

But the data shows that many people face an impossible choice between unaffordable borrowing, if they can access credit at all, and going without essential needs.

The role of over-indebtedness in affordability problems means an important part of the solution is preventing over-indebtedness arising in the first place, and promoting early, safe ways out of repayment difficulty that minimise financial exclusion.

But the data shows affordability is a fundamental barrier to access for many people: there is a mismatch between the number of UK adults who are unable to repay any form of credit and the limited availability of affordable credit and alternatives like discretionary grants.

Alternatives are needed

The briefing sets out three priorities to fill this gap. The first is putting the Household Support Fund (HSF), which funds local authorities in England to provide grants to those in financial crisis, on a permanent funding.

The devolved governments in Scotland and Wales have established stable, long-term crisis support schemes that help people in crisis to meet day to day essentials and larger one-off costs like repairs and white goods.

In England the HSF, established during the pandemic, has begun to fill a gap that emerged following the steady erosion of local welfare assistance schemes by cuts to local government funding.

However, the scheme has suffered from repeated temporary extensions that hold back its development (it is now in its seventh temporary iteration), inconsistent local delivery and the diversion of funding to holiday free school meals — an important expenditure but one that should be funded separately. In comparison to the Scottish and Welsh schemes, little HSF funding is available for larger one-off costs, leaving a gap in the support councils can offer.

The Westminster government should now put the HSF on a permanent, statutory footing that provides stability for councils and embeds key best practice principles like a cash-first approach, extends the scheme to larger payments and supports councils to develop holistic support for households in crisis.

A second priority for the Government should be to expand access to ‘no cost’ credit. Fair4All Finance’s pilots of a no-interest loan scheme have shown encouraging results in lending to people who cannot access commercial credit but can afford to repay a no-interest loan. A national scheme will help plug a gap in credit access for financially vulnerable households: the Government should use the forthcoming financial inclusion strategy to commit to a national scheme.

The Government can also expand access to no-cost credit by reforming the budgeting advance scheme in Universal Credit (UC). Budgeting advances need to be treated with caution because they are recovered through deductions from future payments, which can reduce support below the level needed to meet essential costs. But the scheme can be a lifeline to those with few options to meet unexpected costs: sensible tweaks to eligibility, borrowing and repayment conditions can make the scheme easier and safer to use.

Finally, the Government should use the financial inclusion strategy to agree a framework coordinated with the financial services industry to catalyse an expansion of low-cost affordable credit. This will require banks and lenders above a certain size to take steps to extend lending to all borrowers who can afford to repay, including those who are financially excluded, directly or in partnership with purpose-driven finance providers.

The objective of the framework should be to spur investment in lending, infrastructure and partnerships to significantly expand access to affordable credit delivered through responsible models. The Government should commit to pursue legislative options if sufficient progress is not made over the strategy period.

The credit market cannot meet the needs of every consumer safely

A coherent spectrum of alternatives to commercial borrowing is essential to provide options for those whose needs cannot be safely met by the market and meet the Government’s financial inclusion and child poverty objectives.

It will also support growth: increasing the ability of households to withstand and recover from financial shocks — small or large — will make for more financially resilient households and a more resilient economy better placed to grow sustainably.

The extent of low financial resilience in the UK is shocking if not surprising after years of stagnating incomes, rising costs and economic shocks. Ultimately, wider economic and social policy levers are needed to increase incomes and reduce living costs to raise disposable income and ease affordability problems.

But the need for wider action on living costs should not delay action now to expand grants and affordable credit: better options will help struggling households navigate budgeting pressures and challenging life events safely, avoiding the problem debt that deepens poverty and hardship.