Alongside the welfare system and other forms of financial and hardship support, credit is an essential tool that enables households to smooth fluctuations in income, pay for unexpected events and cover periods of increased expenditure such as school holidays. Unfortunately, many people are unable to access lower-cost credit like bank credit cards and loans as they are financially vulnerable, on low or unstable incomes, or have a bad credit history. Many of those in this position will therefore unfortunately turn to high-cost credit, such as payday lending, rent to own or home collected credit, to help meet their needs because they do not have, or perceive that they do not have, any other alternative. The scale of high-cost lending in the UK was already significant before the start of the coronavirus pandemic, with the Financial Conduct Authority (FCA) estimating that three million consumers were using high-cost credit (excluding overdrafts) on a regular basis.
The combined effects of a rising cost of living and the coronavirus pandemic has continued to strain people’s finances. The FCA report that 12 million people across the country now have low financial resilience, meaning they may be struggling to pay their bills and manage everyday living costs. Whilst StepChange, the debt charity, have estimated that 29 per cent (15 million) of adults have experienced at least one negative change of circumstances since the beginning of the outbreak, including redundancy, a reduction in the number of hours worked, furlough with a reduction in salary, or a fall in income from self-employment. They also evidence that one in three of those affected negatively by coronavirus (4.9 million) have borrowed to make ends meet due to their reduced income, with an estimated nine per cent having used one or more forms of high-cost credit and two per cent an illegal money lender. Those in the most vulnerable circumstances face a poor choice of options – go without, go into arrears or take out high-cost credit, which can drain their already limited income with high interest repayments, and push them further into significant hardship.
The case for supporting people to avoid high-cost credit by improving access to lower cost credit via community lenders such as credit unions and Community Development Finance Institutions (CDFI’s) is therefore clear. It not only helps people to deal with short-term financial problems and manage uneven income, but also builds financial stability and resilience that can prevent future financial problems and save costs in the longer term. This should not be seen in isolation, but alongside a holistic package of financial support (such as income maximisation and debt advice) and discretionary funds that ensures the most appropriate outcomes are delivered for the individual’s circumstances.
Given their role as local leaders and place shapers, councils are well placed to support, develop and promote the delivery of affordable and responsible finance, ensuring that it meets local needs and priorities.
Evidencing the need and demand
This can help to build the business case and secure support for investment in relevant service provision. An evidence-based approach will maximise the effectiveness and value of local delivery, ensuring scale meets local needs and can be targeted to those who need it the most. Data sets relating to a wide range of issues, including poverty, financial vulnerability, subprime credit use and the impacts of COVID-19, are highlighted to ensure that a holistic evidence base can be developed.
The importance of promoting affordable finance
The direct promotion and marketing of local affordable finance provision is critical to diverting residents away from high-cost lenders. Unfortunately, the services available via credit unions or CDFIs can often struggle to be heard against these high-cost lenders, backed by significant marketing budgets and a highly visible digital and media presence. Additionally, for many of those in vulnerable circumstances who are looking at credit options, it can be hard to see beyond the weekly cost that is often the focus of advertising, and to recognise the longer-term financial implications of high-cost credit. Research by the Centre for Responsible Credit on behalf of Fair For You, evidenced that before finding their way to Fair for You, 80 per cent of their customers had borrowed from other sources in the previous 12 months, including 36 per cent from doorstep lenders and 29 per cent from the rent-to-own sector.