Poor people are penalised for borrowing to make ends meet – a new alliance gives them another way

Michael Sheen has just launched the The End High Cost Credit Alliance. Michael Sheen has been a supporter of many causes throughout his career and is now leading the effort to encourage alternatives to high-cost credit, which has been increasing in recent years, including in his hometown, Port Talbot.

The alliance was created due to the fact that those with the lowest incomes are required to pay the most for borrowing money, even when they’re borrowing to pay to purchase essential items. It is a stark contrast to those with higher incomes who are able to take out loans at lower rates to finance extravagant things like holidays and other high-end consumer products.

The alliance seeks to discuss the needed changes required to provide healthy credit, provide solutions, and offer the tools to test them locally and all over the UK. The alliance also solicits adjustments to regulations, policies, and practices that improve the fairness of credit to all.

This is an issue that is becoming more prevalent. The research conducted by my colleagues and me from the Centre for Household Assets and Savings Management at the University of Birmingham has shown astronomical growth in lending in the last few years. Our most recent financial inclusion monitor report indicates that lending to credit cards is much higher than it was during the height of the 2008 financial crisis.

Credit for consumers (excluding credit cards) was also up by a significant amount after 2010with, with the majority of this being due to automobile finance. The most up-to-date numbers show the growth in lending slowing off, but it’s more than what it was in 2008.

Alternative lenders

However, those with the least income are less likely to get loans on credit cards or obtain personal loans for cars that are new. Instead, they turn to other lenders like payday loan lenders, rent-to-own, doorstep, or home collection lenders. This is often to cover the cost of necessities such as school uniforms, nappies, white items, and sometimes food, as well as to help them get through between jobs. Also, their earnings are lower than what they would have expected because of zero-hour contracts or temporary jobs.

They typically have higher interest rates than conventional lenders. For instance, in 2016, the non-profit organization The Church Action on Poverty highlighted the price of purchasing refrigerator-freezers from BrightHouse, which is a huge weekly retailer of payment services that has shops on the main streets of many cities. The total cost was around PS1,326, including the cost of purchasing the fridge at PS478.33, interest of PS658.74, and different delivery and warranty charges. The same fridge freezer purchased by Fair for You, which is a non-profit community interest Company which is a Community Interest Company, would have cost PS583.68 (including the price of purchase PS373.99 plus the interest PS120.38).

As per the Financial Conduct Authority, the number of people who were able to take out a rent-to-own loan in 2016, and 400,000 of them were in debt from rent-to-own as of the year. The market for home-collected credit is much larger than the rent-to-own market, with 700,000 taking out a home-collected loan in the year 2016 and 1.6 million people who had outstanding debt on these loans by the end of the year.

Several hundred thousand, perhaps millions of people with lower incomes pay a lot for credit access. But this isn’t as it is if the credit market is properly managed and alternative solutions are available.

The necessity for regulation

In the past few years, more stringent regulation of high-cost credit has been enacted. The Financial Conduct Authority (FCA) regulator introduced a number of changes in 2014-2015 to combat reckless lending, such as the introduction of a price limit on high-cost short-term loans, which has reduced the price of payday loans. In October of 2017, BrightHouse was ordered to pay PS14.8m to more than 250,000 customers following an investigation by the FCA, which discovered that it hadn’t adequately assessed the ability of a customer to repay. The company was now paid.

So far, so good. The FCA’s price cap is only applicable to a few types of loans (particularly payday loans), and that means other kinds of credit with high costs, like home-collection credit as well as rent-to-own, are exempt from the price cap. They remain to charge outrageous rates in interest (alongside other fees in the case of rent-to-own). Additionally, traditional credit sources like credit cards and overdrafts are not included in the limit, even though they may cost as much as other credit sources.

The FCA is currently looking at additional strategies to deal with high-cost credit. Our research is consistent with the findings of the 2017 report from the House of Lords Select Committee on Financial Exclusion. The report called for more robust regulations for consumer credit with stronger assistance to credit unions and microfinance institutions.

In addition to improving the regulation of high-cost credit, it is essential to encourage alternatives such as the non-profit Fair For You initiative. Credit unions are an alternative to high-cost lenders, assisting their members in saving money, borrowing, and getting access to various financial services. They are financial cooperatives operated by and controlled by members.

Our study shows that a large number of residents in the UK, whether they are in or working, have extremely low incomes that fluctuate between weeks. This makes it extremely difficult to meet the necessities and is among the primary reasons people are forced to use credit. It is, therefore, crucial to solve these issues of poverty and precarity and also the issue of high-cost credit.

Credit is a crucial lifeline for many and shouldn’t be cut completely. However, lenders should not be allowed to make use of those in dire situations. This initiative, called the End High-Cost Credit Alliance, is, therefore, a vital initiative that will provide other alternatives for high-cost credit and improve the financial landscape in Britain at present.

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