Public concern with the damage caused by high-cost lending has never been greater. Poorer households have been hit hard since the onset of the financial crisis in 2008. Wages have failed to keep pace with rising fuel, food and transport costs, and austerity measures, including both public spending cuts and welfare reforms, are taking the most from those that can least afford it. We are definitely not ‘all in this together’. In fact, for the high-cost lenders – home credit or door-to-door money-lenders, rent-to-own (‘RTO’) stores such as BrightHouse, pawnbrokers and payday lenders – this is boom time.
Damon Gibbons, Director of the Centre for Responsible Credit, has been working with us on this:
Payday lending has grown particularly rapidly. According to the Office of Fair Trading the payday market was worth approximately £2.2 billion in 2011-12 – up from an estimated £900 million in 2008-09. Public concern about people becoming trapped in a spiral of repeat credit use has grown as the sector has expanded.
In a recent review the OFT found that over a quarter of payday loans (28 per cent) are ‘rolled over’ or refinanced at least once.
Similarly, research conducted as part of an earlier high-cost credit review found that over one third (36 per cent) of RTO customers were either fairly or very dependent on this form of credit.
We have therefore been working with Church Action on Poverty and Thrive to look at ways of helping people to escape the high-cost borrowing trap. We have looked at whether better data-sharing about levels of debt could help lenders to conduct more robust affordability assessments, and/or help borrowers to improve their credit ratings and gain access, in the longer term, to cheaper sources of credit. We held meetings and interviews with rent-to-own lenders, credit reference agencies, and users of high-cost credit, as well as a desk-based review of current mechanisms for data-sharing and their impact for low-income consumers.
The findings are not encouraging. In particular:
- A data-sharing requirement imposed on home credit firms by the Competition Commission in 2008 has not produced any downward pressure on prices by encouraging more mainstream providers to compete for these customers.
- Home credit firms fail to use the available information to properly assess a customer’s ability to repay a new loan.
- There is considerable evidence of irresponsible payday lending, despite the fact that over half of all payday loan transactions are now reported to credit reference agencies.
We concluded that we need to do much more to make sure that lenders know what borrowings people have; know their income; and are required to leave them with enough money to live on.
As a result, we are calling for the regulator to require all high-cost credit lenders to register details of their agreements and the borrower’s income on a real-time database. This database should then be used to enforce sensible limits on the amount of borrowing permitted, relative to the borrower’s income.
In September we will launch a new publication and campaign action targeting high-cost lenders. Help us to stop the legal loan sharks and ensure that people on low incomes pay Fair Prices.
This work is part of our ‘Food, Fuel, Finance’ programme, tackling the ‘Poverty Premium’ paid by people on low incomes for everyday goods and services.