Most households are in debt. Many face making repayments to multiple banks and finance companies at once, but some are trapped in an ever-intensifying cycle of borrowing to pay off old loans and to cover the costs of household emergencies.
The Financial Conduct Authority (FCA), set up in the wake of the finance crisis of ten years ago, reported on so-called ‘high-cost credit’ last week. It looked at the problems people caught in the spiralling debt trap face and was tasked with weighing up whether the interest rates and charges they are often forced to pay are fair.
Prior to publication we at New Economics Foundation expected the FCA to offer up a glass that, in the best case, be up to half full. And that has certainly been the case, with the proposals set out last week not adequate to not solve the deep, systemic and growing problem of household debt in the UK.
The FCA’s lineage as a regulator is pertinent because not since the days immediately prior to the finance crisis have levels of personal debt been so high. UK households currently owe around £239million in unsecured consumer credit and the Centre for Responsible Credit estimates that 7.6million people are spending more than one quarter of their income on debt payments, not including mortgages or accommodation costs.
That’s shocking because not only is it a financial and emotional burden for households - there are strong links between financial stress and mental ill health - but also because the build of household debt suggests that at some point we may reach a tipping point when people simply cannot borrow any more and so stop consuming.
And it’s really the whole gamut of consumer lending products that need looking at. Even really conventional and supposedly reputable ways to borrow, such as overdrafts and credit cards, are systematically targeted at poorer households and at a punishingly high price. For instance recent research from Which? shows borrowers can be charged £179 to borrow £100 over 30 days on an unarranged overdraft. And herein lies the fundamental injustice; nothing less than a scandal that belongs more to a Dickensian era.
If you have a decent, stable salary, savings for when the washing machine or car breaks down and some form of security, such as a mortgage, then you won’t pay much – if anything – to borrow money to buy consumer items. If on the other hand you’re on low wages, in an insecure job with fluctuating hours, with no savings and a family to feed and clothe, then the chances are debt will be costly as you won’t be able to pay it off fast.
To paraphrase the film Withnail and I, loans are free to those that can afford them and very expensive to those that cannot. Or to put it more bluntly, finance companies are preying on people who have not choice but to borrow and charging rip off interest rates.
For many, the costs stack up over time and often dwarf the sum that they originally borrowed. In the worst cases, the costs of borrowing are more than twice the ‘substantive’ sum, meaning that if you borrowed £1,000 you end up paying £3,000 or more back.
To level the playing field, NEF is part of the End the Debt Trap campaign, which is made up of a coalition of organisations calling for interest rates and charges you face when you borrow to be capped. This has recent historical precedent - in 2015, the FCA was compelled by government to apply a credit costs cap to so-called payday lenders; Wonga and the like. All the evidence suggests this has worked, not only because it has reduced the cost of taking out payday loans but also because its reduced the size of the payday lending business.
Ironically, as the Which? research into overdrafts also reveals, the charges people face by using payday lenders are now lower than more conventional and supposedly reputable forms of lending. This is precisely because of the cost cap applied to payday loans.
Now, we need the FCA to apply the same kind of cap to all forms of consumer credit to prevent poorer households from being ripped off because they don’t have decent credit ratings or because they can’t draw on savings or comfortably off parents. As this is unlikely, the next step is to bring debtors themselves, groups and organisations that work on and are concerned with poverty, churches and faith groups and politicians together to press for the government to legislate.
Alternative lenders that have a clear social mission and that exist to offer low cost loans to poorer households in times of crisis are also important. The actor Michael Sheen is building a brilliant initiative in Port Talbot that aims to do exactly this.
And in the end, we also have to tackle the reasons why people are forced to borrow so much - low wages, precarious work, punishingly high rents - and build an economy that works for people and that doesn’t rip them off.
But ending the debt trap in which the poorest people find themselves ensnared as a result of the rip off charges they face is something the politicians and regulators can do right now.
Hanna Wheatley is a Researcher at New Economics Foundation