There is a call today for careful reforms to cut the cost of credit for people on lower incomes and a warning that some well-meaning attempts to reform high-cost lending risk leaving poorer people with less choice and facing even higher costs.Research for the Joseph Rowntree Foundation shows that people on low, insecure incomes often borrow at annual repayment rates of between double and five times their original loan. The study, by the Personal Finance Research Centre at Bristol University, says some commercial lenders traditionally associated with the home credit market are already moving away from serving people on low or unstable incomes.
The researchers argue that any intervention that speeds up this trend risks being counter-productive, unless sources of more affordable credit are found to fill the gap. They have found that no existing credit sources meet the full needs of poor people.
The research is based on survey information, detailed discussions with low-income borrowers and interviews with lenders and other bodies, including the Department for Work and Pensions. Based on their findings, the researchers suggest the main credit needs among low-income people are for small, unsecured, fixed-term loans; quick access to credit without lengthy, intrusive application procedures; affordable weekly payments without hidden extra charges; automatic repayment arrangements and opportunities for late payments or rescheduling loans without extra charges when temporary problems arise.
The report says most of these measures add to the cost of lending, for both commercial and non-commercial credit providers. It says the Social Fund, administered by the Benefits Agency, does provide low-income households with interest-free loans for furniture and other essential items, but the required level of repayments, which are taken at source from social security payments, tends to be high. Credit unions and other community-based schemes offer cheaper loans but membership or access is often restricted and repayment methods do not always meet the needs of poor people.
The report calls for an extension of access to the Social Fund, an increase in the availability and sustainability of non-profit lenders and a reduction in the cost of commercial credit. Expanding the discretionary Social Fund, the researchers say, would achieve the most immediate impact by making more loans available. The necessary increase in investment, they say, could be achieved through a partnership between the state and private lenders.