In Search of Fair Credit
This week saw the Financial Ombudsman Service report that complaints against payday lenders have just reached a five-year high. There were nearly 40,000 new complaints brought last year, up a "startling" 130% on the 17,000 the previous year.
In 2015, after years of sustained pressure from campaigners, the Financial Conduct Authority moved to put a cap on the interest rates charged by payday loan companies. The move ensured that no borrower will ever pay back more than twice what they borrowed, and someone taking out a loan for 30 days and repaying on time will not pay more than £24 in fees and charges per £100 borrowed.
As we have previously discussed, the high-cost credit market is can be like one big game of whack-a-mole – as one avenue to exploiting those on low-incomes is hit, another one seems to pop up. Campaigners therefore switched their attention to another expensive form of credit targeted at the most vulnerable: the rent-to-own market.
This is an area that End Furniture Poverty and our parent social enterprise, FRC Group, have some experience of. In 2015, FRC Group launched Our House, what they hope would be an ethical competitor to high street rent-to-own stores such as Bright House and Perfect Home. You can read the full Our House story here. In short, the venture failed because it would not lend to customers if it meant going without. If the loan would result in the applicant not having enough money left to pay rent, buy food, clothe children and put the heating on, then a loan was rightly declined.
We took the lessons we had learned from the Our House experience to lobby the FCA – alongside a whole host of other charities and organisations up and down the country – to take action on exploitative rent-to-own stores. Eventually, in March 2019, the FCA announced firm action to curb these retailers. As with payday loans, credit was capped at 100% so that nobody would have to pay back more than double what they had borrowed. The big worry for us at EFP is that, as in game of whack-a-mole, is what problem will be next to pop up. If people are unable to access mainstream or high-cost credit, they may be forced to consider even less reputable forms of credit, such as a loan shark – and that is an outcome that nobody wants.
Luckily, there are alternatives out there.
Fair for You is a Community Interest Company set up in 2015 to provide flexible, affordable loans to people on low incomes – exactly the sort of people who would traditionally go to high-cost rent to own stores. Fair For You allows families to buy goods direct from their suppliers, with flexible affordable repayment schedules. As well as helping people access essential items affordably, it also serves to improve their credit rating, making it much easier for them to access mainstream credit in future.
Credit unions are also an invaluable resource for those that can afford to pay into them regularly enough to qualify for a loan – a barrier for some. For those that do qualify, loan products can often be tailored to individual needs and at affordable rates. Because credit unions are focused on serving their members rather than maximising profits, credit unions are often able to the sort of smaller, shorter term loans that many banks simply do not offer – and for which other specialist lenders charge very high interest rates.
The credit marketplace can be a difficult one to navigate, especially for those on low and no-incomes who may struggle to access mainstream credit. With so many companies out there looking to capitalise on and take advantage of these people, it is vitally important to help guide people toward fair, affordable alternatives. People shouldn’t be forced to pay over the odds for essential goods – and they certainly shouldn’t have to put themselves on a slippery slope. These ethical providers help make sure that need not happen.