Why the time has come to end high cost credit
Personal debt levels are rising at a considerable rate. The Money Charity recently reported people in the UK owed £1.576 trillion at the end of January 2018. Since the economic crisis in 2008, we have seen a perfect storm of pay freezes across the public sector, reductions in funding for local authorities, significant benefits cuts, a reduction in affordable credit and the cost of everyday items increasing in price much faster than expected. Alongside these challenges, there have also been significant changes in the poverty profile, with in-work poverty becoming much more significant. The UK Poverty Report from Joseph Rowntree in 2017 found that "14 million people live in poverty in the UK – over one in five of the population. Eight million live in families where at least one person is in work."
Money worries can lead to serious mental health problems, relationship breakdown and even suicide. Money Saving Expert founder Martin Lewis describes debt and mental health as a ‘marriage made in hell’. Worrying about money can also reduce our ability to think rationally and make good decisions (as demonstrated in a report from the Behavioural Insights Team) and this can lead to people with money worries searching for a quick fix to an immediate need rather than thinking through the best long term option.
There has been a backlash against high cost payday lenders such as Wonga, where the typical APR is 4,200 per cent
While there are many organisations, such as the Money Advice Service and Citizens Advice Bureau, working to support those people who find themselves in problem debt, there is less being done to tackle the problems of high cost credit that can often be the catalyst that pushes someone on a low income into a crisis situation. There has been a backlash against high cost payday lenders such as Wonga, where the typical APR is 4,200 per cent (meaning you may pay back 42 times the original amount), but high cost credit still remains the go to solution when you need money fast.
In order to begin to address this problem, actor Michael Sheen recently launched a campaign at the Responsible Finance conference to end high cost lending. The End High Cost Credit Alliance exists to bring fairness to lenders and customers alike. The alliance will bring together partners representing businesses and charitable organisations who have a role to play in providing fairer finance options to the everyday consumer.
Nesta is doing some key pieces of work in this area, for example through the Savers Support Fund, where through £1 million of money from DCMS we are funding five organisations to improve money management and reduce debt for young people and families in England. One of those grantees is Purple Shoots, a microfinance charity based in Wales which provides low cost loans to support small businesses. Their Self Reliant Groups model brings together small groups of people from within a local community to save small amounts of money regularly. These savings can then be used to provide a much needed buffer for group members when financial shocks occur, limiting the need for members to seek credit elsewhere.
In addition to this, Nesta has partnered with Government to develop the Inclusive Economy Partnership and will be running an innovation process in order to support innovators with initiatives in Financial Capability and Inclusion to scale. The Inclusive Economy Partnership has also partnered with the End High Cost Credit Alliance in order to work with major corporate organisations and civil society to develop more affordable credit products.
Creating access to credit that is delivered fairly and responsibly will be a long term challenge but, with the collective will of both public, private and third sector organisations and a few high profile individuals to tackle these issues head on, there is the potential to help move many people out of poverty in the years to come.