affordable credit: the way forward - bristol university | school

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Affordable credit

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Affordable creditThe way forward

Sharon Collard and Elaine Kempson

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First published in Great Britain in February 2005 by

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Sharon Collard is a Research Fellow at the Personal Finance Research Centre (PFRC), University of Bristol.

Elaine Kempson is Professor of Personal Finance and Social Policy Research and Director of the PFRC.

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Contents••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••

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Acknowledgements iv

1 Introduction 1Overview of credit sources available to low-income households 2Policy background 5Aims and objectives of the research 8Research methods 8About this report 9

2 Borrowing on a low income 10Profile of credit use by people on low incomes 10Advantages and disadvantages of different types of credit 12What do people on low incomes want from a credit source? 14

3 Lending to people on low incomes 19Small loans for short periods 19Weekly cash payments 19Managing the risk of default 20Changes in the commercial sub-prime credit market 23

4 Widening access to affordable credit 25The extent of need for affordable credit 25The type of credit needed 27Will competition deliver more affordable credit? 28The potential impact of existing policy initiatives 30Other options for widening access to affordable credit 32Conclusion 36

References 38Appendix A: Focus groups with low-income borrowers 40Appendix B: Round-table participants 42

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We are grateful to the Joseph RowntreeFoundation for providing financial support forthe project, and to our advisory group whoprovided valuable advice throughout.

We would like to thank Karen Rowlingson at theUniversity of Bath, who contributed to thesecondary analysis of depth interviews and theliterature review. We are also very grateful toAnna Ellison and her colleagues at Policis for thedata analysis they carried out for the study. SallyTaylor helped facilitate the focus groups withlow-income borrowers. Geoffrey Cooke kindlycommented on the draft report.

We would also like to sincerely thank the focusgroup participants, credit providers and round-table participants who made the study possible.

Acknowledgements

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The poor pay more for many things – but,arguably, it is the extent to which they pay morefor credit that puts the greatest strain on theirbudgets. In fact, levels of credit use vary littlewith household income. But, in contrast topeople who are better off, people on lowincomes borrow more often for necessities anduse sources of credit that have higher charges(Berthoud and Kempson, 1992; Kempson et al,1994).

Despite a considerable widening in theavailability of credit, access to high-street credit isstill severely constrained for people on low andinsecure incomes. As a consequence, many ofthem borrow from lenders operating at the lowerend of the sub-prime credit market, whereannual percentage rates (APRs) typically rangefrom 100 to 400% (Rowlingson, 1994; Kempson,1996; Kempson and Whyley, 1999b; Speak andGraham, 2000; Whyley et al, 2000; Whyley andBrooker, 2004).

People living in deprived areas suffer a doubledisadvantage, especially if they live in a high-riseblock of flats or an area of high crime, aslicensed lenders may be unwilling to do businessin their neighbourhood (Rowlingson, 1994;Kempson, 1996). Unless they have family orfriends they can turn to, this leaves them withtwo options: the Social Fund, which is severelycash-limited and only available to those onqualifying benefits; or unlicensed lenders, wherecharges can be astronomical and consumerprotection is non-existent (Herbert and Kempson,1996; Speak and Graham, 2000; Whyley et al,2000).

Introduction

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The sub-prime credit market

There are two groups of lender in the sub-primecommercial credit market. The first tends to offercredit products that cater specifically for the needsof low-income borrowers. It includes some long-standing credit providers, such as home creditcompanies and pawnbrokers, and some newerentrants such as sale and buy back outlets andrental purchase shops. This report focusespredominantly on these types of lenders.

The second group comprises companies that offersimilar credit products to mainstream (or prime)lenders such as banks. The difference is that theyare targeted at people who have difficulty gainingaccess to the mainstream credit market becausethey have a poor credit record or a history of baddebt.

There have been a number of attempts todevelop low-cost credit products for people onlow incomes, including credit unions; savingsand loans schemes set up by housingassociations; and community-based loanschemes. Take-up of these credit services has sofar been modest and none of them has madesignificant inroads into the customer base at thelower end of the sub-prime credit market.Although the reasons for this are not wellunderstood, it is clear that cost is not always themain consideration when people on low incomesdecide where to borrow money. The greatmajority of people who borrow from the homecredit companies (moneylenders), pawnbrokersor rental purchase companies are aware of theprice they have to pay (Rowlingson, 1994;Collard and Kempson, 2003). Even so, they often

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Affordable credit

choose to use these lenders as they offer creditproducts that meet their particular needs.

Overview of credit sources available tolow-income households

The types of credit available to people on verylow incomes comprise small, short-term cashloans and credit tied to the purchase of goods.While sub-prime credit cards1 are now availableto people with impaired credit records, they havenot yet been widely marketed to people on verylow incomes. In any case, there is compellingevidence to indicate that many low-incomeborrowers are wary of using credit cards, as theyfear overspending and falling into debt(Kempson et al, 1994; Whyley et al, 2000; Jones,2002; Collard and Kempson, 2003).

Commercial cash loans

The borrowing requirements of low-incomecredit users are generally modest – a fewhundred pounds at most. Home creditcompanies (also known as licensedmoneylenders, doorstep lenders or weeklycollected credit companies) are the maincommercial providers of small-value personalloans in the UK. The market is dominated byfour companies – Provident, Cattles, London andScottish Bank and S&U. Together, they have 69%of the UK home credit market. Provident is thelargest of the four, with 49% of the market. Theremainder is spread across a large number ofsmall companies operating at a local or regionallevel (Datamonitor, 2004).

Compared with the mainstream credit market, thecosts of a home-collected loan are high, withAPRs ranging from around 100 to 400% or more,depending on the lender and the size and termof the loan. There are, however, no additionalcharges should the borrower miss a payment andneed the loan to be rescheduled (Rowlingson,1994; Jones, 2002). Loans are typically for £500 orless, repayable over six or 12 months.

The Consumer Credit Association (the tradeassociation for home credit companies) estimatesthat around 3 million people have loans fromone of their members or another licensed homecredit company. This may be an overestimate ofthe size of the market, as surveys consistently putuse of home credit companies at around 2% ofhouseholds (Kempson and Whyley, 1999a) and arecent survey of British consumers indicated that5% of individuals (around 2.3 million people)had taken out a loan from a home creditcompany in the past 12 months (Whyley andBrooker, 2004). Survey data complied by Policiscorroborates this, indicating that somewherebetween 2 and 2.5 million people in the UK usehome credit at any one time.

There are several possible explanations for thediscrepancies between the survey data andindustry figures. First, it is clear that some peopleare reluctant to admit to using a moneylender.Second, survey questions vary in their wordingand often fail to identify people who use homecredit companies but make their repayments bydirect debit rather than home collection. Third,many people buy vouchers or goods ininstalments, rather than taking cash loans, andthey may well categorise this as buying on hirepurchase when questioned in surveys. Fourth,people who use more than one home creditcompany at any one time would probably bedouble-counted in industry figures but appearonly once in survey data.

Pawnbrokers offer small cash loans secured onproperty, usually jewellery. There are twonational chains of pawnbroker – Albemarle andBond, and Harvey and Thompson, with about 50stores each – but for the most part this industrycomprises small companies operating at a local orregional level.

Pawnbrokers typically charge interest percalendar month from the start of a loan, andmonthly interest rates across the industry rangefrom around 5 to 12%. Based on a loan of £100over six months, this equates to an APR ofbetween 70 and 200% (Collard and Kempson,2003).

All the evidence suggests that fewer people usepawnbrokers than borrow from a home creditcompany. In a recent survey of Britishhouseholders for the Department of Trade andIndustry (DTI) around 0.1% of people said that

1 Sub-prime credit cards have APRs much higher than themainstream, typically ranging from 20 to 60% APR, as wellas lower credit limits. The APR may come down and thecredit limit be increased once a customer has established ahistory of repayment (Datamonitor, 2004).

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they, or their partner, had a loan from apawnbroker (Kempson, 2002). Once again, this islikely to be an underestimate as there is muchthe same reluctance to admit to pawning as thereis to using a home credit company. There are noindustry estimates of the number of users ofregistered pawnbrokers, although the NationalPawnbrokers Association estimates that there arearound 800 shops in Britain. Extrapolating fromresearch conducted in the US (Johnson andJohnson, 1998) one arrives at an average figureof around 1,000 customers and 4,000 pledges pershop per year. If the level of use in Britain weresimilar, this would give somewhere in the regionof three quarters of a million users per year.

A relatively new product in the cash loans marketis sale and buy back, offered by companiessuch as Cash Converters and Cash Generator,which operate through franchises with 100 and70 stores across the UK respectively. Sale andbuy back is not strictly a credit product;customers sell their goods to the company andretain the right to buy them back within anagreed period of time – usually a month. Thesetransactions are not currently covered by theConsumer Credit Act and companies do not haveto advertise their APRs. They are, however, oftencriticised for the large difference between thesale and buy back price (Whyley et al, 2000;Jones, 2002). Unlike most pawnbrokers, cash isoffered on a wide range of items, includinghousehold and electrical goods, although bothCash Converters and Cash Generator also offerpawnbroking services alongside sale and buyback.

A growing number of cheque cashers,pawnbrokers and home credit companies offerpayday loans, and there are an estimated 1,500outlets nationwide. Customers write one or morecheques to the company, which, in return for afee, agrees not to present the cheque for up to30 days. The customers receive the amount ofthe cheque, less the fee. To access this form ofcredit, customers need to have a bank accountwith a cheque book and also a regular incomegoing into it – normally from paid employment.Although predominantly used by youngerworking people to fund discretionary spending,payday loans are also used by some low-incomefamilies to make ends meet or in an emergency(Dominy and Kempson, 2003).

Finally, there is anecdotal evidence to suggestthat unlicensed moneylenders are fairlywidespread in low-income neighbourhoods(Kempson and Whyley, 1999a; Whyley et al,2000; Jones, 2002). It is, however, almostimpossible to provide a reliable estimate of theextent of unlicensed lending that takes place.According to one study, there could be over60,000 people in the UK using organised butunlicensed moneylenders at any one time(Kempson and Whyley, 1999b). Many morewould borrow from less organised sources –mainly local people offering very small, veryshort-term loans. Policis estimates that aroundhalf a million people on low incomes in the UKhave experience of using unlicensed lenders. Aspart of its plans to tackle illegal moneylending(see later in this chapter), the DTI intends tocarry out research to determine the extent ofillegal lending in the UK. The costs of borrowingfrom an unlicensed lender are incredibly high.Examples include borrowing £20 on Friday andpaying back £40 the following Monday. It is alsocommon practice for the organised unlicensedlenders to take people’s benefit books as security(Whyley et al, 2000).

Non-commercial cash loans

The biggest non-commercial provider of loans topeople on low incomes is the government-runSocial Fund Budgeting Loan scheme.Budgeting Loans are intended to meet the lump-sum needs that people on Income Support,Income-based Jobseeker’s Allowance or PensionCredit may be unable to cover out of theirincome. Loans are interest-free and deducted atsource from benefits. People generally apply tothe scheme for essential items such as furniture,beds and bedding, and white goods.

In 2003-04, 1,250,000 Budgeting Loans wereawarded. Of these, around a half (51%) weremade to one-parent families. Gross expenditureon the scheme was around £484 million; theaverage award was £384. The demand forBudgeting Loans far outstrips the availableresources, and the rate of refusal is high. Arounda quarter of applications in 2003-04 were turneddown. The main reasons for refusal were eitherbecause applicants had not been in receipt of aqualifying benefit for 26 weeks (30% of refusals)or because of outstanding Social Fund debt(54%).

Introduction

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Affordable credit

Membership of credit unions has grown rapidlyin Britain over the past 10 years, albeit from avery low base. Their development has beenpatchy, with lower levels of provision in Englandand Wales than in Scotland (or Northern Ireland).As a result, many communities do not haveaccess to a credit union. The latest availablefigures on credit unions indicate that there arearound 700 in Britain with half a millionmembers, spread across employee-based andassociational credit unions as well as community-based credit unions2. This represents about 1% ofthe adult population, many of whom will not beon low incomes. A proportion of these memberswill also be savers rather than borrowers. Creditunion interest rates are fixed by law at 1% permonth on a reducing balance, equivalent to12.68% APR. The amount members can borrow isdetermined by the amount they have in savings;typically this will be in the region of two or threetimes the amount saved. The value of loans madein 2002 totalled around £220 million, giving anaverage loan size of around £470. A minority ofcredit unions have experimented with ‘instantaccess’ loans for non-savers.

In addition to credit unions, a new form ofsavings and loans scheme, which is targeted attenants, has evolved through partnershipsbetween housing associations and buildingsocieties or banks. The first of these, NewHorizons, was set up by Cambridge HousingSociety and Cambridge Building Society. Similarschemes are run in the north east of England, byDarlington Building Society and a group of localhousing associations; and in Edinburgh, whereProspect Community Housing Association hasestablished a partnership with HBoS plc. Likecredit unions, people can borrow a multiple oftheir savings, although instant access loans arealso offered by some schemes. As these schemesare often regarded as an investment in the localcommunity rather than commercial ventures, thecost of loans is heavily subsidised and interestrates tend to be just 1% above the Bank ofEngland base rate. Loan repayment isunderwritten by money deposited with the bankor building society by the housing association.Use of these schemes is fairly modest. Onesavings and loans scheme, for example, hadmade 20 loans since 2000; another had made 100loans in the five years since it opened.

Since the late 1990s, several community-basedloan schemes have been established, whichoffer lower-cost personal and business loanswithout the need to save. These are not-for-profitorganisations run in partnership with acommercial bank. Again, they tend to be locallybased, serving small geographic areas(Community Development Finance Association,2004), and include the South Coast Money Line(formerly Portsmouth Area Regeneration Trust),East Lancashire Moneyline, Salford Moneylineand Derbyloans, with other schemes in theprocess of being set up. The CommunityDevelopment Finance Association wasestablished in 2002 to promote and strengthenthis sector. One such scheme, whose managerwas interviewed during the course of this study,had made 1,850 loans in the 32 months since itopened, 90% of which were personal loans, theremainder being related to business start-up orhome repair and improvement. On averagearound 60 to 70 new personal loans arecompleted each month. The APR for personalloans ranges from around 24 to 31%, dependingon the term of the loan and whether theborrower is a new or repeat customer. Theaverage size of loan to new customers is around£400; £700 for repeat customers.

Informal borrowing from family and friends isrelatively common among people living on lowincomes, particularly if they have children(Berthoud and Kempson, 1992; Kempson et al,1994). The amounts people borrow are small –typically a few pounds to tide them over untilpayday or until they receive their next benefitpayment. This type of borrowing is oftenreciprocal, particularly among mothers anddaughters (Kempson et al, 1994).

In addition, informal savings and loansschemes are commonplace in many minorityethnic communities (Herbert and Kempson, 1996;Kempson, 1998). Typically they are based on agroup of friends, relatives or work associateswho save collectively and take it in turn to haveaccess to the money saved. Similar schemes alsoexist in some white British communities – inLiverpool, for example, they are known as‘Tonnies’ or ‘Tontines’ (Jones, 2002). These areprimarily savings clubs with the money beingpaid out at an agreed date – often at Christmas.Members can, however, apply for a loan and thissometimes carries interest.

2 www.fsa.gov.uk/credit_union/cred_stats.pdf

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Credit tied to the purchase of goods

Like home credit, agency mail order isconcentrated among a small number of largefirms. The largest by far (with a 71% UK marketshare) is the merged Littlewoods/GUS businessthat also runs the Kays catalogue. The two otherlarge companies are Otto, which includes theFreemans and Gratton catalogues; and Redcats,which runs the Empire catalogue. In 2002,around 14 million people in the UK used agencymail order, down from just under 21 million in1996 (Competition Commission, 2004).

Around one in five (20%) of low-income non-pensioner households use agency mail order, andit is a particularly important source of creditamong poor families with children and peopleunable to work because of long-term ill health ordisability (Kempson, 2002). Moreover, it is oftenthe only acceptable form of credit for poorpeople who are otherwise anti-credit.

Goods bought through mail order catalogues andrepaid over 20 or 40 weeks are, technically,interest-free. In practice, their price is oftensignificantly higher than identical items for salein the high street. If repayments are spread overmore than 40 weeks, interest is charged at 28.8%or more (Jones, 2002).

Rental purchase outlets, notably Brighthouse(formerly Crazy George’s), have sprung uparound Britain in recent years, often in lessaffluent shopping centres. There are now around100 Brighthouse stores nationwide. Customerscan spread the cost of furniture, white goods andother household items by paying regularinstalments to the shop. The attraction for low-income consumers is that, unlike other forms ofhire purchase, no credit checks are required.Instead, customers have to provide references, inthe form of five people who can vouch for them(see Chapter 2).

Like mail order, goods sold on rental purchaseare considerably more expensive than those soldin other high street shops. Moreover, althoughthe APR advertised by Brighthouse is 29.9%,there is evidence to suggest that customers arestrongly encouraged to take out ‘optional’insurances and service cover, which significantlyincrease the costs of borrowing (Jones, 2002).

Some of the home credit companies also offercredit linked to the purchase of goods and sellvouchers on credit that can be used in selectedstores. The interest rates on these tend to belower than those on cash loans.

Policy background

Until fairly recently, credit was not perceived tobe central to debates on access to financialservices. This is because borrowing is often seenas something that exacerbates the problems facedby low-income households, as makingrepayments reduces their already limiteddisposable income. But while borrowing moneyto supplement a low income may not bedesirable, it can sometimes be unavoidable –either to buy essential household items or tomake ends meet (Kempson and Whyley, 1999b).

In the past few years, however, attention hasturned to the high costs of borrowing faced bypeople living on low incomes. As part of itscommitment to tackling the twin problems offinancial exclusion and over-indebtedness, thegovernment aims to widen access to affordablecredit for low-income borrowers. It has also beenunder intense pressure to meet its manifestocommitment to tackle the issue of extortionatelending through legislative changes to the 1974Consumer Credit Act.

Provision of affordable credit

Following the Social Exclusion Unit’s report onneighbourhood renewal (Social Exclusion Unit,1998), the government established 18 PolicyAction Teams to look at a wide range of issuesaround social exclusion. One of these, PolicyAction Team 14, examined the scope forwidening access to financial services.

Among its recommendations, Policy Action Team14 called for the development of credit unions inBritain, to provide affordable credit and promotesmall-scale saving among people on low incomes(HM Treasury, 1999). The government and bankssubsequently provided financial support toexpand and consolidate the existing credit unionnetwork. In July 2002, a new regulatory regimefor credit unions was introduced, bringing themunder the control of the financial servicesregulator, the Financial Services Authority (FSA).

Introduction

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Affordable credit

Under this regime, credit unions becameofficially recognised deposit-takers, providinggreater consumer protection for credit unionmembers.

The White Paper on consumer credit indicatesthat the government and the credit unionmovement have continued to work together todiscuss how the sector might be developedfurther (DTI, 2003).

Policy Action Team 14 also recommended thatthe Department for Work and Pensions (DWP;then the Department of Social Security) shouldexplore the scope for reforming the discretionarySocial Fund. Subsequently, in its 2003 budget thegovernment announced an additional £90 millionfor the scheme over the three years to 2005-06.Some administrative changes have also beenimplemented to improve monitoring and ensurethat existing resources are directed to those mostin need (HM Treasury, 2004a). More recently,the Treasury has announced that from April 2006the standard repayment level for BudgetingLoans will be reduced from 15 to 12% of theborrower’s income, and an end to the complex‘double debt’ rule3 which has confused applicantsand limited access to repeat Budgeting Loans inthe past (HM Treasury, 2004b, p 47; 2004c, p 64;2004d, p 27). These measures aside, there havebeen no substantive changes to the scheme since1999, despite the recommendations made byseveral research studies and the (then) SocialSecurity Committee (Whyley et al, 2000; SocialSecurity Committee, 2001; Kempson et al, 2002;Kempson et al, 2004).

Apart from the developments that arose from therecommendations of Policy Action Team 14, arange of other locally based initiatives have beenestablished to provide lower-cost credit. As wenoted earlier, these include savings and loansschemes and community-based loan schemes.

Despite this progress, many low-incomeborrowers still do not have a viable alternative tohigh-cost lenders. In acknowledgement of this,the government reasserted its commitment topromoting access to affordable credit in its 2004Budget report. Working in partnership with thefinancial services sector, voluntary organisationsand community bodies, it intends to achieve “asignificant increase in the availability ofaffordable credit for those on the lowestincomes” (HM Treasury, 2004a, p 115). Thiscommitment was restated in the Treasury’s 2004Spending Review (HM Treasury, 2004c) and itsChild Poverty Review (HM Treasury, 2004b).

The Government wants to explore mechanismsthat allow profitable loans to be made to those ona low income at a much lower rate of interest. TheGovernment therefore intends to work inpartnership with the private and voluntary sectorsto develop models that make more profitable loansavailable. Any pilots will be evaluated to ensurethat the loans enhance people’s ability to managetheir finances responsibly. (HM Treasury, 2004c, p64)

More detailed proposals for increasing access toaffordable credit were published in December2004 as part of the Pre-Budget Report. Inparticular, the government announced plans toestablish a growth fund for not-for-profit lendersto increase the coverage, capacity andsustainability of the sector. Other proposalsincluded mapping the location of credit unionsand community-based loan schemes to makesure that financial support for these organisationsis appropriately targeted; and a consultation onthe costs and benefits of raising the cap oninterest that credit unions can charge on loans(HM Treasury, 2004d).

Legislative changes

Alongside these government efforts to increaseaccess to more affordable credit through not-for-profit organisations, significant legislativechanges are in the pipeline for commercialconsumer credit.

In July 2001, the government launched a wide-ranging review of the 1974 Consumer Credit Act.Among other things, the review aimed to tacklethe issue of extortionate lending (DTI, 2003).

3 All Budgeting Loan applicants have a maximum borrowinglevel. Those with an existing Budgeting Loan are not able toobtain a new loan until they have repaid half the moneythey owe. Thereafter, the additional amount they canborrow is the difference between their maximum borrowinglevel and double the amount they still owe. For example, ifthe maximum level of borrowing is £700 and an applicantstill owes £200 on a current Budgeting Loan of £500, theycan take out a new loan of £300 (£700 minus £400, that is£200 × 2).

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Following a lengthy period of deliberation andconsultation, the government’s plans for reformof the existing consumer credit legislation wereoutlined in its White Paper, Fair, clear andcompetitive, published in December 2003 (DTI,2003). This includes steps to create “a moretransparent regime so consumers can makebetter-informed decisions and get a fairer deal”(p 5) and measures to strengthen the creditlicensing system. It also sets out proposals tostamp out irresponsible and unfair lendingpractices.

A number of reforms have already been put intrain. These include:

• the mandatory disclosure of specific pre-contract information to consumers before acredit agreement is completed;

• the provision of key financial and otherinformation in a standardised format inconsumer credit agreements;

• the introduction of an actuarial formula tocalculate the amount of early settlement rebatedue to consumers. This replaces the ‘rule of78’, which was considered to be unfair toconsumers; and

• the form and content of advertisements forcredit, such as the key financial informationthat must be provided and the prominence ofthe APR.

There are also plans for the provision of betterpost-contractual information to borrowers,including regular statements of the outstandingamounts owed.

The extortionate credit provisions of the 1974Consumer Credit Act have been stronglycriticised for their ineffectiveness. Fewextortionate credit cases have been broughtbefore the courts since the implementation of theAct, and even fewer were proven (Kempson andWhyley, 1999a; DTI, 2003). In the light of this,there has been a concerted campaign for aninterest rate ceiling in the UK, such as exists inseveral European countries and some states ofthe US. This has been led by Church Action onPoverty through their Debt on Our Doorstepcampaign.

In August 2004, however, the governmentannounced that an interest rate ceiling would notbe introduced as part of the shake-up ofconsumer credit law (DTI, 2004a). Research

commissioned by the DTI on the effect ofinterest rate controls in Europe and the UShighlighted the danger that poor people wouldlose rather than gain from such an initiative(Policis, 2004). Instead, the government haschosen to tackle the issue of high-cost credit inother ways. These include legislative changes tobroaden the existing ‘extortionate credit’provisions to encompass unfair terms andpractices as well as the cost of credit (DTI/DWP,2004).

The White Paper also sets out the government’splans for a cross-departmental strategy to tacklethe growing problem of over-indebtedness in theUK. This builds on earlier work carried out bythe Taskforce on Over-indebtedness, which wasset up by the DTI in October 2000 to look atways of achieving more responsible lending andborrowing. The policy proposals laid out in theWhite Paper include a pilot enforcement schemeto tackle illegal moneylenders. The pilot projects,which cover the West Midlands and Scotland,were launched in September 2004.

Finally, the Office of Fair Trading (OFT)announced in June 2004 that it was considering a‘super-complaint’ on the home credit industrysubmitted by the National Consumer Council(NCC)4. The super-complaint is based onresearch carried out by the NCC that suggeststhat certain features of the home credit sector arehaving an adverse impact on consumers (Whyleyand Brooker, 2004). Following a preliminaryreview, the OFT concluded that the followingfeatures of the home credit market may prevent,restrict or distort competition:

• Many home credit customers are in a poorbargaining position and their financial needmay mean that they are not price-sensitive.

• Customers may have difficulty comparingloans and do not appear actively to do so.

• ‘Step-up’ and ‘rollover’ loans tend to tiecustomers in to existing lenders.

• Agents’ relationships with customerscontribute to making them unlikely to switchlenders.

Introduction

4 Under the 2002 Enterprise Act, designated consumerbodies can refer fast-track complaints to the OFT. Thesesuper-complaints focus on areas where the complainantsuspects there are market structures or practices that areworking against the interests of consumers.

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Affordable credit

• Aspects of the structure of the market maydeter entry, particularly on a significant scale(OFT, 2004a).

After a period of consultation with home creditproviders, the OFT announced in December 2004that it had referred the supply of home credit tothe Competition Commission for furtherinvestigation.

The intense debate around credit and debt in theUK has been mirrored in Europe. Mostimportantly, a European Directive Proposal onconsumer credit from the European Commissionwas published on 11 September 2002. Theunderlying aim of the directive was to harmonisethe laws, regulations and administrativeprocedures of the European Union MemberStates, and this might well lead to significantchanges to the credit market, especiallymoneylending. However, the directive has notpassed smoothly through the EuropeanParliament and, at the time of writing, the futureand content of the revised directive is uncertain.

Aims and objectives of the research

It is against these policy debates that ourresearch was carried out, with the overall aim ofexamining the scope for widening access toaffordable credit, and assessing the mostappropriate and viable ways of ensuringsustainable nationwide provision.

Within this, the study set out to provide:

• a detailed understanding of the features ofcredit products (including both commercialand non-commercial credit sources) thatappeal to and meet the needs of poor people;and conversely those that act as barriers touse;

• an analysis of the constraints on lending topeople on low incomes and the key featuresthat can make it a viable proposition;

• an investigation of the scope for reducing thecosts of lending and widening access to moreaffordable credit among poor people; and

• provisional estimates of the scale of demandfor affordable credit.

The study focused predominantly on people ofworking age because credit is used most whenpeople are setting up home and when they have

young families, and declines considerably afterretirement (Kempson, 2002).

It is important to note that the study was notdesigned to recommend a ‘best buy’ among thesources of credit available to poor people. Rather,it is an attempt to look beyond the rhetoric thathas dominated much of the debate to see howrealistic it is to reduce the costs of lending topeople on low incomes who have a highlikelihood of default. In doing so, we havelooked for ways of reducing the charges made bycommercial credit providers and of making thenot-for-profit sector more sustainable by reducingthe level of subsidy it requires.

Research methods

The research comprised five linked stages:

• a literature review and reanalysis of depthinterview scripts;

• focus groups with low-income borrowers ofworking age;

• a round-table meeting with representatives oftrade bodies and government departments;

• interviews with commercial and non-commercial credit providers;

• analysis, carried out by Policis, of a consumersurvey of access to and use of consumer creditamong people on low incomes.

The research began with a short literature review,followed by the reanalysis of depth interviewscripts from five earlier qualitative studies thateach looked at use of a wide range of creditsources available to people on low incomes(Kempson et al, 1994; Rowlingson, 1994; Whyleyet al, 2000; Kempson et al, 2002; Collard andKempson, 2003). From this, the main attractionsand drawbacks of each type of credit wereidentified, and the essential features of a creditsource for low-income borrowers distilled.

A series of five focus groups were then held withlow-income credit users of working age, toexplore further the perceived positive andnegative attributes of the types of credit theyused. Participants were also asked to assess therelative importance of the essential features of acredit source that had been identified in previousstudies. Two focus groups comprised people inlow-waged work who received Tax Credits; theremaining three consisted of people whose main

9

income was state benefits (see Appendix A fordetails).

Telephone interviews were held with a range ofcredit providers during the course of theresearch. Among those interviewed wererepresentatives of two high-street banks; threenon-commercial credit providers; and threecommercial lenders that offer credit to low-income borrowers. The interviews covered arange of topics including: the barriers to lendingto people on low incomes; the risks and costs oflending in this market; and the possibility ofreducing the costs to the borrower, eithercommercially or in partnership with otherorganisations. In addition, interviews were heldwith a range of other organisations with a directinterest in issues raised by the research –including relevant trade associations and theDWP.

These interviews and focus groups informed thediscussion at a round-table meeting, held withrepresentatives from key governmentdepartments and trade associations representingboth commercial and non-commercial creditproviders (see Appendix B for details). Thepurpose of the round-table meeting was toexamine the possible scope for reducing thecosts of commercial lending to people on lowincomes, as well as the potential for public–private partnerships to offer lower-cost products.A further round of interviews was subsequentlycarried out, to follow up specific issues that hadbeen raised at the round-table meeting. Theseincluded discussions with HM Treasury, theAssociation for Payment Clearing Services(APACS) and a leading credit reference agency.

This qualitative work was supplemented byquantitative analysis, undertaken on our behalfby Policis, of data derived from a sample of 1,070nationally representative consumers in the lowestquintile of UK household incomes. Respondentswere interviewed face to face in their homesduring December 2003.

Introduction

About this report

The remainder of this report largely draws on theinformation collected from the focus groups, theround-table meeting, the interviews with creditproviders and the quantitative analysis carriedout by Policis. The literature review andsecondary analysis of depth interviews arewritten up more extensively in a separateworking paper5.

Chapter 2 looks at borrowing on a low income,starting with a profile of credit use among peopleon low incomes. Drawing on their experiences ofusing credit, we then explore what low-incomeborrowers want from a credit source, and the keyfeatures that their ‘ideal’ source of credit wouldinclude.

Chapter 3 switches focus to lending to people onlow incomes. This looks at things from theperspective of lenders and covers the distinctivefeatures of lending in a high-risk market and thesafeguards needed to contain the level of default.

Chapter 4 brings these two perspectives together,describes the size and nature of the potentialmarket for more affordable credit and exploresways of reducing costs. It also looks at whethercompetition will deliver more affordable credit,the potential impact of existing policy initiativesand other options for widening access toaffordable credit, including changes to thediscretionary Social Fund.

5 The working paper can be downloaded fromwww.ggy.bris.ac.uk/research/pfrc/index.htm

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Affordable credit

2

Over the past two decades, the UK hasexperienced a credit boom, so that today credituse is the norm rather than the exception.Mirroring developments in the US, the range ofcredit products and credit providers hasincreased dramatically. Moreover, in an intenselycompetitive market, the customer base hasexpanded to include people who wouldpreviously have been excluded because of animpaired credit record or a history of bad debt.This has been made possible by increasinglysophisticated credit screening techniques and thepricing of products to reflect better the risk oflending.

Coupled with record levels of employment andrising incomes, the expansion of the prime andsub-prime credit markets means that more peoplethan ever have the capacity and the opportunityto borrow. For those on the lowest incomes,however, little seems to have changed. Peoplewho are either out of work or have low andunstable earned incomes still have relatively fewchoices open to them when it comes to credit.Their borrowing requirements continue to belargely met by specialist commercial lendersoperating at the lower – and more costly – end ofthe sub-prime credit market.

Profile of credit use by people on lowincomes

The Policis survey of people living in the poorestfifth of UK households shows that four types ofcommercial credit predominated among thesources they had used in the last 12 months:home credit, mail order catalogues, credit cardsand other personal loans (such as from a bank orfinance house). Use of these sources of credit

Borrowing on a low income

was eclipsed, however, by borrowing from theSocial Fund and from family and friends (Table2.1).

There were some important differences betweenthe sources used, depending on the financialcircumstances of their household. Those with afull-time wage in their household had more oftenused mainstream credit – credit cards, personalloans and store cards. In contrast, use of homecredit was low and hardly anyone had usedrental purchase. Borrowing from friends andfamily was particularly common among thisgroup of householders (Table 2.1).

The pattern of use was quite different amongpeople living in households without a full-timewage – that is, households dependent on statebenefits or with only part-time or occasionalearnings. Among this group, home-collectedcredit and mail order catalogues were the sourcesof commercial credit most often used. Use ofrental purchase companies was also mainlyconcentrated in this group. Even so, 6% hadcredit cards and 4% had personal loans (Table2.1). Previous research has indicated that thesecommitments generally remain from a period offull-time employment (see, for example,Kempson and Whyley, 1999b). But by far themost common source of borrowing was theSocial Fund, used by a quarter of thesehouseholders in the past 12 months. Comparedwith households that had a full-time wage,borrowing from friends and family was much lessprevalent. As we discuss later, this was probablybecause their friends and family were in a similarfinancial position to themselves (Table 2.1).

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The Policis survey analysis also shows that threequarters (75%) of people living in the pooresthouseholds say that they have a need to borrowmoney – at least from time to time. Thispercentage was the same whether they had afull-time wage or not. At the same time, it wasclear that the need to borrow small sums ofmoney was greatest among those without a full-time earner in their household. Faced with theprospect of raising £200 to £300 in the event of acrisis, six in ten (61%) people living inhouseholds with no full-time earner said thiswould be very difficult or impossible withoutborrowing, compared with less than three in ten(28%) who had a full-time wage coming into thehome. Likewise, two thirds (65%) of people inhouseholds with no full-time wage said that theywould find it very difficult or impossible to save£500 for a special purpose – compared with fourin ten (39%) of people in households with full-time earnings.

There were also significant differences in thelevel of credit impairment between people inhouseholds with and without a full-time wage.This was captured in a number of ways in thesurvey, including adverse credit records (countycourt judgements; bankruptcy; mortgagepossession; or adverse records with creditreference agencies); a history of missed creditpayments in the past 12 months (three or morerepayments missed; charges for late payment;and demands for immediate repayment in full);and refused credit applications (Table 2.2). Ineach case the incidence was a good deal higheramong people who did not have a full-time wagecoming into their household.

Taken together, this analysis suggests that theneed for more affordable credit is greatest amongpeople who live in households without a full-time wage – those living on social securitybenefits, or who have only part-time or


Table 2.1: Sources of commercial credit used in the last 12 months by people living in the poorest fifth of UKhouseholds (%)

On benefits or only part-timeAlla or occasional earnings Full-time earnings

Home credit 6 8 1Mail order 8 9 5Credit card 7 6 8Personal loan (eg bank) 5 4 7Store card 3 2 6Car loan 1 1 2Rental purchase 1 2 b

Hire purchase 1 1 2Payday loan 1 1 1Pawnbroker 1 b 1Credit union loan 4 5 2Personal loan from family or friend 13 11 20Social Fund loan or grant 20 25 2

Notes: a All people living in the poorest fifth of UK households; b less than 1%.Source: Policis

Table 2.2: Degree of credit impairment among people living in the poorest fifth of UK households (%)

On benefits or only part-time Full-timeAlla or occasional earnings earnings

Adverse credit records 24 26 16History of missed payment 24 26 17Refused credit application 26 27 19

Note: a All people living in the poorest fifth of UK households.Source: Policis

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Affordable credit

occasional earnings. This was borne out by thefocus groups. The main sources of credit used byparticipants who were not in work were homecredit, mail order and the Social Fund BudgetingLoan scheme. In contrast, those who were inlow-paid employment clearly had wider access tocredit and several talked about having overdrafts,store cards and credit cards (albeit from sub-prime lenders).

Previous research has likewise found that usersof high-cost credit tend to be people living onlow incomes over the long term; who are likelyto rent their home; and who have dependentchildren living at home. A significant number ofthem borrow to make ends meet or to pay billsas a result of ongoing income inadequacy. But ahigh proportion also borrow from high-costlenders to pay for Christmas and birthdays, andto buy branded clothes and consumer electronicsfor their children, to prevent them beingstigmatised at school (Kempson et al, 1994;Kempson, 1996; Kempson and Whyley, 1999a;Whyley and Brooker, 2004).

Advantages and disadvantages ofdifferent types of credit

The secondary analysis of depth interviews andthe review of existing literature provide aninsight into the main attractions and drawbacksof the different types of credit used by low-income borrowers.

There were a number of aspects of home creditthat customers appreciated. It was a familiarsource of credit that was straightforward toaccess. It offered small cash loans that could berepaid weekly in cash. Payments were collectedfrom customers’ homes, which was not onlyconvenient but also reduced the chances ofdefault. And lenders were willing to rescheduleloans should a borrower be unable to meet therepayments.

The downside of using home credit was its highcost, relative to other sources of credit; theencouragement of further borrowing by someagents; the practice of refinancing or ‘rollover’loans; the obligation to pay felt by someborrowers because of their friendly relationshipwith the agent; the perceived stigma of homecollection; and the fact that the collection of

payments seemed to have become less reliable,as agents sometimes did not turn up when theywere supposed to. These factors deterred somepeople from using home credit at all. But homecredit customers commented on these drawbacksas well.

Pawnbroking also offered a quick and easy wayof obtaining cash loans, without the need forlengthy application forms or credit checks. Itoffered some flexibility in relation to repayment,as a loan can be paid back in full at any timewithin the six-month contract, without anyadditional charge for early settlement.Alternatively, it can be renewed for a further sixmonths upon payment of the interest accrued todate. The key drawback was that many peopleliving on a low income simply had nothing ofvalue that they could pledge. Among those whodid, the high cost of borrowing, the low loan-to-value rate, not being able to repay the loan ininstalments, the risk of losing one’s valuables,and the problems of losing a pawn receipt wereall cited as drawbacks of using a pawnbroker.

Like pawnbroking, the attraction of sale and buyback for low-income consumers was that itoffered a ready source of cash. In addition, saleand buy back shops generally accepted a widerrange of items than a pawnbroker. People whohad borrowed money in this way felt that themain drawbacks were the low loan-to-value ratetypically offered by shops and the relatively shortperiod of time they had to buy back their goodsbefore they were sold. The cost of buyingproperty back was another disadvantage. Finally,unlike pawnbroking, sale and buy back is not acredit agreement and therefore customers are notcovered by the Consumer Credit Act.

Payday loans offered easy access to credit topeople with a cheque guarantee card and regularincome. Indeed, users often contrasted this withthe difficulty they encountered trying to increasethe credit limit on their overdraft or credit card.Payday loans were seen as cheaper thanexceeding the credit limits on a credit card oroverdraft without authorisation, and the chargeswere known in advance. Some people also feltthat they provided more control over spendingthan these forms of running account credit.

Set against these attractions were the high costsof payday loans. In addition, some peopledisliked the very thing that had attracted them in

13

the first place – namely the ease of access. Theyfelt that it was too easy to get into a situationwhere they regularly borrowed at the end ofeach month or their cheques were constantlyextended or where they kept deferringrepayment of the loan through lack of money.

People invariably considered borrowing from anunlicensed lender to be the very last resort forsomeone who desperately needed cash. The factthat a request for a loan was hardly ever turneddown was its only attraction. The cost ofborrowing in this way was incredibly high and itwas common practice for lenders to take people’sbenefit books as security. In addition, there wasevidence of some organised lenders usingintimidation and physical violence if debtorswere late with their repayments or had difficultyrepaying what they owed.

The main advantage of Social Fund BudgetingLoans is that they are interest-free. For Muslims,this means that they comply with the teaching ofIslam, which forbids the use of interest-bearingfinancial products. In addition, since changes tothe scheme in 1999, the application form isrelatively straightforward to complete anddecisions are made fairly promptly about whetheror not a loan will be awarded. Users liked thefact that loan repayments are deducted directlyfrom benefits as this minimised the risk of fallinginto arrears.

The scheme has a number of importantlimitations, however. It is only available topeople who have been in receipt of IncomeSupport or Income-based Jobseeker’s Allowancefor at least 26 weeks. Use of Budgeting Loans isalso limited by lack of knowledge among eligiblebenefit recipients, as well as lack ofunderstanding about the rules governing thescheme and how decisions are reached.

Moreover, because the scheme is cash-limited,applying for a Budgeting Loan is something of alottery and a significant proportion ofapplications are turned down. Even if an awardis made, applicants often do not receive the fullamount of money they requested. Finally, manyusers of the scheme were critical of the highrepayment rates set for Budgeting Loans.

Credit unions provide access to credit forpeople who would not be able to borrow from ahigh-street lender; they are low cost; and the

unions are willing to reschedule repayments if aborrower encounters financial difficulties. Otherattractions include affordable payments, thefriendliness of credit unions and the fact thatthey are local.

At present, however, many people on lowincomes do not have a credit union in theirvicinity. The link between saving and borrowingwas also perceived as a drawback both by non-members and by members who had lowincomes. First, it deterred some people fromjoining a credit union, as they either could notcommit to saving regularly, or they believed thatthey would be unable to save enough money tobe able to borrow the sort of sums they normallyneeded. Second, new members generally have toestablish a savings record in the credit unionbefore they can apply for a loan. This was a realdifficulty for some people and especially thoseon the lowest incomes. Third, and the mostcommonly mentioned drawback among creditunion members on low incomes, was that theregularity of their saving was taken into accountwhen they applied for a loan. Some credit unionshave experimented with instant access loansbacked by loan guarantee funds but theavailability of these remains limited. Loanguarantee schemes also have to be carefully andrigorously managed if they are to be effective(Jones, 2003). Another drawback to the linkbetween savings and loans is that membersgenerally have limited access to their savingswhile a loan is being repaid.

Credit unions’ reliance on volunteers can also bea disadvantage. Some people were deterred fromjoining a credit union because of a perceivedlack of confidentiality; others by a fear thatvolunteers would not be capable of running aprofessional organisation, especially if there werefew or no paid staff. And while some memberssaw the friendliness of their local credit union asan attraction, others felt that their local creditunion was run by a clique that only served aselected group of people.

Borrowing from friends and family wasgenerally interest-free and not subject to a rigidrepayment schedule. It could, however, put astrain on relationships. More importantly, peopleon low incomes often did not know anyone whocould lend them anything more than a fewpounds.


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Affordable credit

Informal savings and loans schemes alsoprovide loans that are interest-free and havebeen set up in Muslim communities because theycomply with Islamic teaching. But they were notwithout their drawbacks. First, there was the riskthat people who received the collective savingsearly on ceased to save once they had got themoney. Second, the set level of weekly savingwas sometimes beyond the means of people onlow incomes.

On the whole, agency mail order was the mostacceptable of the sources of commercial creditavailable to people on low incomes. Indeed, itwas often the only source that people used –especially among pensioners and people fromsome minority ethnic communities.

The main advantage of mail order cataloguesfrom the user’s point of view was the ability tospread the costs of goods they needed to buybut could not otherwise afford. They alsooffered a convenient way of shopping for peoplewho found it difficult to get to a shoppingcentre. People valued knowing exactly howmuch they would pay for the goods they boughtand that the money was repaid in set amountsover a fixed period of time. If they could sign upas an agent in their own right people did so, forthe commission they could earn. At the sametime, mail order catalogues were accessible topeople who might otherwise find it difficult toget access to lower-cost credit as they could beused through a third party.

Buying goods through mail order was perceivedto have fewer disadvantages than other sourcesof credit that are available to people on lowincomes. People who chose not to use mail ordercatalogues did so for several reasons, includingfear of overcommitment; the extra costs incurredby defaulting on repayments; and the fact thatprice mark-ups on mail order goods made themmore expensive than buying on the high street. Akey drawback is the fact that this form of credit islinked to the purchase of goods, yet people onlow incomes often need cash loans for things notavailable in catalogues.

As well as allowing customers to spread the costof buying ‘lumpy’ goods, rental purchaseshops such as Brighthouse do not carry out anycredit checks. All customers have to do isprovide the name, address and telephone

number of five people who can confirm that theyknow the customer and verify their address.

Despite the appeal of rental purchase, for mostpeople the disadvantages far outweighed theadvantages. The fact that goods bought on rentalpurchase can be repossessed if payments aremissed was the chief drawback from thecustomer’s point of view. Some people alsocommented on the stringent debt recoverypolicies. Another disadvantage was cost. Goodssold on rental purchase are a good deal moreexpensive than those sold in other high-streetshops. In addition, although attracted by theadvertised APR of 29.9%, customers werestrongly encouraged to take out the ‘optional’insurances and service cover that increased thetotal cost even more. For example, it has beencalculated that a fridge freezer that could bebought in cash for around £350 would cost over£850 from Brighthouse if the customer paid for itin instalments and took out the optionalinsurance covers (Jones, 2002).

What do people on low incomes wantfrom a credit source?

In many ways, the focus groups confirm what wealready know about the features that areimportant to low-income borrowers when usingcredit. Over and above this, however, they givean indication of the relative importance of thesedifferent elements.

First and foremost, people on low incomes wantto be able to access credit quickly and easily,without lengthy or intrusive applicationprocedures. Linked to this, they want to be fairlysure before they apply that they have a goodchance of obtaining the money they need.

Affordable repayments are generally moreimportant to low-income borrowers than the totalcost of credit. In addition, a suitable repaymentmethod helps minimise the risk of default. Low-income credit users also value lenders thatrecognise the difficulty of maintaining regularpayments on a low income and so make noadditional charges for late or missed loanpayments.

Charges for the early settlement of loans werenot a key consideration for the focus group

15

participants when they took out credit. Nor, theysaid, was the company providing the credit.

Access

Without exception, people on low incomes valuethe ability to access credit quickly and easily.Among focus group participants, this was one oftheir highest priorities. Ease of access was aparticular advantage of commercial credit sourcessuch as home credit, pawnbroking, sale and buyback, and rental purchase. Invariably, theapplication process for these forms of credit wasdescribed as straightforward and fast, with nolengthy forms to complete or extensive creditchecks to be carried out.

“You can ask [the home credit company] fora loan on the Friday and they’ll be out hereby the Monday … and they’ll give it to youthat day, it’s convenient.”

Indeed, one focus group participant, an existinghome credit customer, described how she simplyphoned up her local agent when she wanted totake out a loan. In contrast, others said they hadbeen deterred from applying to local not-for-profit loan schemes because of the morecomplex application procedures.

While low-income borrowers do not think thatcredit is a right or that it should be given withoutconsideration to their ability to repay, they wantto know in advance whether or not anapplication is likely to be successful. This meansthat the access criteria need to be simple andtransparent – the Social Fund in particular wascriticised for its complex rules regarding the sumsof money that can be applied for and howdecisions are made. Changes to simplify theserules have recently been announced (HMTreasury, 2004c).

People also dislike intrusive questioning abouttheir need for a loan. They accept that they needto demonstrate their ability to meet therepayments on a loan. What they dislike ishaving to justify their wish to borrow for aparticular purpose (as used to be the case withthe Social Fund) or making their case to acommittee of local people (as happens for largerloans from many credit unions).

Providing security for loans, such as savings orgoods, can help to reduce the costs ofborrowing. But, as discussed earlier, it can alsoconstrain access to lower-cost credit.

Transparency of cost

Like low-income borrowers in previous studies,focus group participants were well aware thatthey paid high charges for borrowing small sumsof money or buying goods on credit. Few usersof home credit can quote the APR they are beingcharged, but they generally know the totalamount of money that they have to repay ontheir loans. The same is not necessarily true of allforms of credit.

APRs are a very poor way of comparing the costof different loan products at this end of the creditmarket. First, there are some factors that increasethe cost of borrowing but are not reflected in theAPR, such as price mark-ups on goods offeredfor sale on credit, and the sale of insurancepolicies to people who lack home contentsinsurance to cover the goods sold on rentalpurchase. As a consequence, obtaining creditthrough mail order and rental purchase can looka great deal cheaper than it is. Second, althoughsale and buy back is similar to pawnbroking, it isnot covered by the Consumer Credit Act and noAPR needs to be quoted. Third, some lenderslevy default charges if payments are missed;others, such as home credit companies,reschedule payments at no extra cost, but buildthis into the total charge for credit, which has tobe reflected in the APR.

As a consequence, although people were awarethat costs were high, they found it difficult to saywhich sources of credit were the most expensiveand they wanted the total cost to be fixed andtransparent. This meant no hidden charges thatemerged only after they had signed (orcommitted themselves to signing) the creditagreement. While this is a distinct selling point ofhome credit loans, rental purchase has beenheavily criticised for the lack of transparency inits charges. As discussed earlier, people areattracted by the advertised low interest rates, butthen find that high price mark-ups and optionalextras (such as insurance and warranties) raisethe price significantly. Default charges, leviedsoon after the payment date, added even more tothe cost.


16

Affordable credit

Level of repayments

On the whole, the level of repayment andwhether or not it was affordable were moreimportant considerations than the total cost ofcredit or the APR. In other words, people werelooking for weekly repayments and amounts thatthey could easily accommodate in theirhousehold budget.

Although Social Fund Budgeting Loans areinterest-free, the high levels of repayment attractvociferous criticism from users of the scheme(see also Kempson et al, 1994; Whyley et al,2000; Barton, 2002; Jones, 2002; Kempson et al,2002). It has recently been announced that thestandard level of repayment for Budgeting Loanswill be reduced from 15 to 12% of benefitincome (HM Treasury, 2004c). Even so, this stillleaves the level of repayment a good deal higherthan other sources of credit. In the light of this,focus group participants commented favourablyon the fact that, if two Budgeting Loans are takenout in succession, the existing loan has to berepaid in full first before any repayments aretaken for the second.

Some focus group participants said they wouldlike to be involved in setting the level ofrepayments they made to credit providers. Creditunions have been particularly praised for the waythat borrowers are encouraged to discuss whatthey can realistically afford to pay with a loanofficer before the amount and term of the loanare agreed (Whyley et al, 2000).

The frequency of payment is another importantconsideration for people living on a low income.Weekly rather than monthly payments fit in withthe period over which they tend to budget. Theweekly payment period also suits people(typically benefit recipients) whose income isreceived on a weekly or fortnightly basis. Homecredit customers felt they would struggle if theyhad to make larger monthly repayments.

“Because I’m paid weekly it would workout difficult for me because I’d have to putmy money away each week … it would behell, you know. It’s alright if you’re paidmonthly isn’t it? But if you’re not it wouldbe a bit of a bugbear.”

Indeed, the quantitative analysis carried out byPolicis for this study indicates that seven in ten

low-income home credit users would find itharder to manage their repayments if they wereunable to pay weekly. In keeping with this, a keydrawback identified by pawnbroking customerswas the need to settle the loan in full at the endof the term. Many would have preferred to makeregular weekly repayments.

Finally, there is the fact that people like setpayments that do not vary over the credit term.So, sources of credit that do not levy separatedefault charges (for example home credit, creditunions and the Social Fund) were muchpreferred. This is discussed further later in thischapter.

Repayment method

For low-income borrowers, it is imperative thatthe method of repaying credit fits in with theirstrategy for money management, so that they canmaintain financial control. Indeed, having anappropriate method of payment was one of thetop priorities for the focus group participants.

Home collection has traditionally been popularamong low-income borrowers, partly because itis convenient, but more importantly because itminimises the risk of falling behind withpayments (see Rowlingson, 1994; Jones, 2002;Whyley and Brooker, 2004). Quantitative analysiscarried out by Policis showed that around twothirds (66%) of low-income home credit userssaid they would find it difficult to keep up theirpayments without home collection.

However, the home credit customers (past andpresent) who took part in the focus groups weremore ambivalent about home collection. Somefound it embarrassing, even degrading, to havean agent call at their door. Others had foundhome collection increasingly unreliable – theydisliked having to wait at home for the agent andran the temptation of spending the money theyhad put aside.

“If they don’t come when they say they arecoming you end up spending the money.”

Home collection also deterred some people fromusing this form of credit because they associatedit with being in financial difficulty and having adebt collection agency visit their home everyweek to collect arrears payments.

17

Quantitative analysis of the poorest 20% ofhouseholds carried out by Policis found thataround half (49%) would prefer to use directdebits to make repayments on their householdand credit commitments. Only 15% said theywould prefer to have payments collected fromtheir home. Home collection was, however,much more popular among home creditcustomers and those who were credit-impaired.Even so, a quarter (25%) of home creditcustomers favoured paying by direct debit.

Previous research has shown that, like others,people on low incomes appreciate theconvenience of direct debit payments. Indeed, iftheir incomes were higher, this is how many ofthem would choose to pay their household billsand other commitments. However, in theircurrent circumstances, they feared incurring heftybank charges if they did not have enough moneyin their account at the time the direct debitpayment was claimed. With little money to spare,this was a risk they were not prepared to take(Kempson and Whyley, 1999b; Collard, 2002).

These views were reflected among the focusgroup participants. Most of them said they wouldprefer to have credit repayments deducteddirectly from their income rather than collectedfrom their home, particularly if it brought downthe cost of borrowing. While some did not ruleout the use of direct debits to make repayments,it was much less popular than direct deductionfrom income. This was largely based on theirexperience of having Budgeting Loan repaymentsdeducted from their benefit income before theyreceived it. Above all, participants valued the factthat they ‘knew where they were’ with directdeductions and could not fall behind withpayments, at least while they remained onbenefits. This echoes the findings from earlierresearch on the Social Fund (Whyley et al, 2000;Jones, 2002).

Handling of financial difficulties

Life on a low income is a financial balancing act,especially for people of working age. As aconsequence, people who live on low incomesfor long periods of time almost inevitably find itdifficult to make ends meet from time to time.

In recognition of this, commercial and non-commercial creditors who lend in this market

generally build in a degree of flexibility to therepayment schedule. Home credit companies, forexample, typically expect a 26-week loan to bepaid over 30 weeks. Credit unions andcommunity-based loan schemes are also willingto reschedule loans if the borrower falls intofinancial difficulty. These creditors do notgenerally levy extra charges for this. The cost ofproviding flexibility is instead reflected in thetotal cost of credit.

Focus group participants valued this flexibleapproach. Like other low-income borrowers, theywanted to spread the charges for default over theperiod of the loan, rather than face additionalcharges at a time when, by definition, they wereleast able to pay.

In contrast, rental purchase companies (and mostmainstream lenders too) can have high additionalcharges for missed payments. This tends toexacerbate an already difficult situation for theborrower. And, while Social Fund BudgetingLoans can be rescheduled, this fact is not widelypublicised and few people are aware of thepossibility (see Whyley et al, 2000; Kempson etal, 2002).

Credit provider

Previous research on overcoming financialexclusion has found that people want to dealwith reputable companies that understand thedifficulties of managing on a low income(Kempson and Whyley, 1999a; Collard et al,2001).

As a consequence, low-income borrowers tend tostick with the ‘tried and tested’. They rely heavilyon personal recommendations from family andfriends when it comes to choosing a lender(Rowlingson, 1994; Whyley and Brooker, 2004)and are wary of creditors they have not usedbefore.

In addition, many long-term users of home creditcompanies and pawnbrokers value therelationships they build up with staff (Kempsonet al, 1994; Rowlingson, 1994; Jones, 2002;Collard and Kempson, 2003). Again, this makesthem unwilling to switch lender, even if it meanssaving money (Whyley and Brooker, 2004).


18

Affordable credit

In fact, this reluctance to switch supplier is trueof consumers across almost all financial products.Research for the DTI showed that people weremuch less likely to switch financial serviceprovider than they were to change to anotherutility company (DTI, 2000). Moreover,resistance to switching is highest among peopleon low incomes who fear a disruption to theirhousehold budget.

In the light of this, it was surprising that thefocus group participants generally agreed thatthey would switch lender to get a better deal ona loan. It is clear, however, that socialisation,personal recommendation and familiarity aresignificant factors in people’s use (and continueduse) of sub-prime lenders. In reality, therefore, itseems likely that among the poorest credit usersthe level of switching would be comparativelylow (at least initially) and particularly to newentrants to the credit market.

The image and perception of credit providersamong low-income borrowers have particularimplications for the penetration of non-commercial lenders into the sub-prime creditmarket. It has long been recognised, for example,that shop-front premises are vital to raising publicawareness, and use, of credit unions andcommunity-based loan schemes.

Public confidence in non-commercial lendersalso needs to be fostered. Credit unions inparticular have been criticised for not alwaysbeing run as professionally as they might be(Rowlingson, 1994; Kempson and Jones, 2000;Whyley et al, 2000; Jones, 2002). The creditunion movement is working hard to address this,for example, by encouraging the employment ofpaid staff and the use of standard financialmonitoring systems. In addition, the regulation ofcredit unions by the Financial Services Authority(FSA) means better protection for membersnationwide.

19

3

Lending to people on low incomes differs frommainstream (or prime) lending in a number ofkey respects. First, there is a higher risk ofdefault as their circumstances are much morelikely to change. Second, people on low incomeswant (and often need) to make weeklyrepayments in cash. Both these factors increasethe costs of lending. Third, the amounts theywant to borrow tend to be relatively small andfor short periods of time. As the costs of lendingare largely fixed, this means that the charges forborrowing are high in relation to the amountsborrowed. This explains why charges amongcommercial sub-prime lenders are high; why not-for-profit lenders with lower charges requiresubsidies; and why mainstream lenders arereluctant to enter this particular market.

In this chapter we look in detail at thesedistinctive aspects of lending to people on lowincomes, as well as giving an overview of recentchanges in this particular credit market.

Small loans for short periods

The costs of setting up a loan do not varyproportionately to the size of the loan and, as aresult, are high relative to the amounts thatpeople on low incomes need to borrow. Lenders(both commercial and not-for-profit) weinterviewed indicated that the cost of setting up aloan for a new customer varies from £30 to £75depending on the extent to which there is areliance on face-to-face screening and whetherthis is done in the home or in an office. Yet thetypical amount for a first-time loan tends to bebetween £100 and £200. Consequently, mostlenders in this market seek to establish a long-term relationship with customers as set-up costsare not generally recovered on the first loan.

Lending to people onlow incomes

Even on repeat loans, the margins tend to besmall, as the amounts borrowed average between£200 and £300. In contrast, mainstream lendersaim to recoup set-up costs on each loan and,therefore, have minimum loan sizes of at least£1,000. This is considerably more money thanpeople on low incomes usually want or need toborrow.

The size of the loan is also important in thecontext of the costs of both the collection ofpayments and managing default. This isdiscussed next.

Weekly cash payments

As we have seen, the great majority of people onlow incomes budget by the week and mostwould choose to make credit repayments weeklyas well. Most currently repay in cash – oftencollected at the doorstep. Even so, as we haveseen, many say they would be attracted topayments being deducted directly from theirincome, in the way that Social Fund loans arerepaid. Use of monthly direct debits, however,can be problematic for those who have to stretchtheir incomes to cover their outgoings.

The experience of collecting payments by directdebit has been more favourable for some lendersthan for others. One not-for-profit lender collectsall repayments by direct debit but offerscustomers the choice of doing so either weeklyor monthly. In practice, most customers chooseto pay weekly and many need help with openinga bank account to facilitate the payments.

Some of the commercial lenders accept monthlydirect debit payments from customers providedthat they do not default. However, they retain the

20

Affordable credit

option of weekly home-collected payments (witha higher APR) for those who struggle to paymonthly. Indeed, one of them commented that,in their opinion, there will always be a marketfor weekly home-collected payments.

Other commercial lenders have experimentedwith monthly direct debit payments for homecollection customers with higher incomes andgood payment histories. These initiatives wereshort-lived, as default rates increased, andcustomers were moved back to weekly homecollection. It is not clear whether this wasbecause the payments had been switched fromweekly to monthly or because they were nolonger ‘managed’ by the lender.

The experience of the not-for-profit lender thatcollects repayments by weekly direct debitsuggests that weekly payments do reduce thelikelihood of default. Even so, safeguards havebeen put in place by this lender in caseborrowers do not have sufficient funds in theiraccount to cover the direct debit payment. If aborrower knows they will not have the money intheir account to cover the payment, they are toldto phone the organisation in advance and thepayment is either not claimed that week or asmaller payment is taken. Although this systemincurs extra costs for the lender, no extra chargeis made to the customer.

In other words, there are two important costfactors here: frequency and method of payment.Clearly, it costs more to collect 52 weeklypayments on a 12-month loan than 12 monthlypayments. The cost is higher still if payments arecollected in cash rather than by direct debit,particularly if this is done in the customer’shome. Again, these costs need to be seen inrelation to the relatively small sums of moneybeing borrowed. Indeed, one lender indicatedthat up to half of the cost of an average loan isdirectly attributable to running a network ofagents who collect weekly repayments (that is,the cost of the agents’ pay plus the costs of theother management and staff structures involved).

Managing the risk of default

The risk of default on credit commitmentsincreases as income decreases, partly becausepeople on low incomes experience a higherdegree of income instability than those who are

better off. Reanalysis of data from the DTI surveyof over-indebtedness shows that about a quarter(23%) of households with gross annual incomesof under £10,000 who used credit had fallenbehind with the repayments. This compares withonly one in twenty (5%) of those with incomesof more than £35,000 (Kempson, 2002). As aconsequence, all the lenders we interviewedstressed the need to manage the risk of defaultby people on low incomes. This had implicationsfor the recruitment of customers, the assessmentof risk and the management of loan repayments.

Customer recruitment

The lenders we interviewed have found thatword-of-mouth recommendation brings the mostreliable customers. New lenders in the low-income credit market find it takes time to build acustomer base. They have to rely on advertisingrather than personal recommendation andtherefore need to screen applicants rigorously.Even so, they often have to accept high defaultrates in the early years. Before it restructured itsbusiness, it is reported that one new entrant tothe home credit market experienced bad debtcharges that at times amounted to more than athird of its loan book (Datamonitor, 2004).

Risk assessment

Mainstream credit providers generally base theirlending decisions on automated risk assessmenttechniques, notably credit scoring. As a result,most people on low incomes find it difficult toborrow from mainstream lenders, even thoughthese lenders seldom base their decisions on anapplicant’s income. In practice, people areexcluded on the basis of a range of other factors,such as housing tenure and employment status,which effectively act as a proxy for income inmost credit scorecards.

Commercial companies that lend to low-incomeconsumers make far less use of these automatedrisk assessments. Instead, they rely heavily on theface-to-face assessment of potential customersand the use of small initial ‘trial-run’ or ‘step-up’loans. Moreover, they lend to people known tohave a higher risk of default by seeking tomanage, and so control, that risk.

21

Risk assessment in the mainstream credit market

Most mainstream lenders use automated creditscoring systems to help them decide whether ornot to lend to a potential borrower. These assessthe risk of an applicant defaulting on their creditcommitments by applying mathematicalmodelling techniques. Application scorecards arebased on the past payment records of otherborrowers with similar personal and economiccircumstances. Subsequent credit applicationsmay be assessed using behavioural scoringsystems, which are based on the applicant’s ownpast payment record with the lender. The creditscoring system allocates points for each piece ofrelevant information and adds these up toproduce a score. Depending on the score, thelender may or may not agree an application forcredit.

Mainstream lenders often supplement creditscoring with information held by the creditreference agencies. These agencies hold detailsof financial and publicly available information,including who is on the electoral roll; courtjudgements and bankruptcies; information on theperformance of credit agreements (particularlyadverse performance); and the number of creditenquiries made by an individual6. Data on theperformance of credit agreements is provided ona voluntary basis by lenders, but by lodging thisinformation they can then access details of anysimilar credit performance information held bythe credit reference agency7. There are threecredit reference agencies that cover the UK –Experian, Equifax and Callcredit – of whichExperian is the largest.

Risk assessment in the low-income credit market

In contrast to the automated systems used bymainstream lenders, those who specialise inmeeting the needs of people on low incomesrely heavily on face-to-face screening of newcustomers. Often this is done in the customer’shome. This screening is designed to assess boththe capacity for and the commitment to repayinga loan. Unlike remote lenders, those that screencustomers face to face potentially have access tomuch more information about the personal and

economic circumstances of applicants (andchanges in those circumstances) on which theycan base their lending decisions. This provides acheck on an applicant’s ability to repay, asexperience has shown that many applicantspresent their finances in the best possible light inorder to maximise their chances of obtaining aloan. It also enables them to identify more easilypeople who have a low level of commitment torepaying any money they owe. Rejection rates atthis stage are fairly high – between 40 and 60% –even among some not-for-profit lenders.

Commercial lenders will usually only make smallloans (between £50 and £100) to a new customerin the first instance. In addition, they oftenmonitor a new customer’s ability to maintainpayments very closely for the first 10-15 weeks,recording not only how many payments aremissed but how many times an agent had to callbefore successfully collecting the repayment.Indeed, lenders find that this is by far the bestway of assessing risk. Both face-to-face screeningand monitoring loan repayments add to the costof lending.

Once a new customer has proved their ability torepay a loan, they can borrow increasing sums ofmoney in subsequent step-up loans. Theapplication and monitoring procedures for repeatloans are generally less rigorous as well, becauselenders have found that a borrower’s pastpayment record is the best predictor of futuredefault. Borrowers may, for example, be able toapply for a further loan over the telephonewithout a repeat of the checks that wereoriginally carried out.

On the whole, the lenders that took part in thisstudy felt that in-house automated credit scoringsystems would not be economically viable in thelow-income credit market, not least because theyare expensive to set up and maintain. That said,some lenders (both commercial and not-for-profit) have been exploring this possibility. Oneof the commercial lenders we interviewed hasdeveloped an in-house behavioural scoringsystem, not to screen potential customers out butrather to assess the profitability of lending tothem, given their likelihood of falling intoarrears. A not-for-profit microfinance institutionin the US has developed a scorecard to facilitatethe identification of people to whom they wouldcertainly consider lending and those who theyshould definitely decline, enabling them to

Lending to people on low incomes

6 www.bba.org.uk7 If creditors only lodge default information themselves, they

cannot access non-default information lodged by others.

22

Affordable credit

concentrate the more intensive face-to-facescreening on those in the middle. Finally, a smallnumber of credit unions have started using theALERT credit scoring system developed by theAssociation of British Credit Unions Limited(ABCUL), the main trade body of the credit unionmovement in Britain.

Moreover, there is evidence to suggest thatcredit reference agency data is not particularlypredictive of borrower behaviour in the low-income credit market. At around £1.50 persearch, lenders also argue that it is uneconomicto use this data for low-value loans. As a result,some commercial and not-for-profit lenders arehighly resistant to its use. Other lenders do,however, use both these methods of screening –but often in conjunction with face-to-faceinterviews. Mail order catalogue companies usecredit reference agency data, as do a number ofhome credit companies, including more than 50smaller lenders8. In addition, around a dozencredit unions now lodge and access data held byone of the large credit reference agencies at apreferential rate, negotiated by ABCUL.

Much of the information required by lendersabout the credit payment histories of potentiallow-income borrowers is not currently placedwith credit reference agencies. Consequently,there is a danger of a vicious circle developing,where the credit reference information isconsidered inadequate, so it is not used by someof the key lenders at the lower end of the sub-prime market, which therefore have no incentiveto lodge information themselves. There are signsthat the information held about people on lowincomes is improving. One of the large creditreference agencies now holds both default andnon-default information for all mail order andmobile phone companies, as well as manytelevision rental, satellite television and cablecompanies. A major gas supplier also sharesinformation in this way and, as noted earlier inthis chapter, some credit unions have started tolodge data about their members.

There is a real risk, however, that the increaseduse of application credit scoring and creditreference agency data in the low-income creditmarket will exacerbate credit exclusion among

the poorest households. As companies becomebetter able to ascertain relative customerprofitability, they will increasingly move awayfrom lending to less profitable customers – thepoorest, the highest risk and the most vulnerable.This is discussed further in Chapter 4.

Risk management

Credit providers that specialise in lending topeople on low incomes are notable for the waythat they manage the risk of default. Unlikemainstream lenders, they draw a distinctionbetween people who are unlikely to repay a loanin full and those who may, for genuine reasons,struggle from time to time to meet a repayment.The latter is a fact of life for people on lowincomes and these sub-prime lenders haveprocesses that accommodate this.

First, they aim to set repayments that they knoware affordable for their customers. This isassessed at the same time as the decision aboutwhether or not to lend, and most lenders wouldargue that this can only be done face to face forpeople on the lowest incomes.

Second, as we noted earlier in this chapter, manylenders closely monitor the repayments of newcustomers for the first 10-15 weeks. They alsotend to offer very small loans initially, increasingthe amount once a customer has a track record ofreliable repayment. This is very similar to the‘stepped loans’ offered by not-for-profitmicrofinance lenders to more riskymicrobusinesses. Credit unions and savings andloans schemes achieve the same end by requiringtheir members to establish a regular pattern ofsaving before they can take out a loan.

Third, many lenders in this market ‘manage’ therepayments of their customers, rather thanrelying solely on the customer to make paymentson time. Traditionally, this has meant homecollection, with an agent visiting the customer tocollect the money owed. The largest home creditcompany has around 12,000 agents supported bya network of 300 branches. But home service ismuch more than a means of collecting payments.Rather, it is central to the way these companiesoperate, providing a method of assessingpotential and repeat customers, selling productsand chasing arrears. Without doubt, maintaininga network of agents is the largest single cost

8 These home credit companies generally only lodgeinformation about credit accounts that have been passedfor debt recovery.

23

incurred by home credit companies, as indicatedearlier in this chapter.

In contrast, the Social Fund is able to ‘manage’payments by deducting them directly frompeople’s benefit income, so that loan repaymentsare entirely outside the control of the borrower.Also, as discussed earlier in this chapter, one not-for-profit lender has developed procedures forminimising the level of default among borrowerspaying by weekly direct debit.

Fourth, many lenders who provide credit topeople on low incomes are prepared toreschedule loans for those who face genuinedifficulties. The lenders we interviewed indicatedthat at any one time between 30 and 40% ofcustomers are late with (or have missed) theirpayments. Unlike mainstream lenders, they donot view this as default and do not usually levyadditional charges for late payment. Even so, thecost does have to be covered – either in the formof higher charges or as subsidies in the case ofmany low-cost not-for-profit lenders.Accommodating these missed payments cangreatly extend the term of a loan and the costs ofadministering it. Figures from three lendersindicate that they extend the average length of aloan by about 20%. Several lenders said that thepropensity of customers to take ‘paymentholidays’ has increased over the past 10 yearsand this has added to their costs. At least onelender had experimented with paymentprotection insurance as an alternative torescheduling loans. But this had added to thecomplexity of their agreements and, in any case,did not cover general fluctuations in ability topay, only loss of income through ill health orunemployment.

Finally, some lenders minimise risk of default byrequiring collateral for loans, in the form ofsavings (credit unions and other savings andloans schemes) or valuables (pawnbrokers). Aswe noted in Chapter 2, this limits access formany poor people – although it undoubtedlyenables others to benefit from the lower chargesusually associated with such secured loans.

Changes in the commercial sub-primecredit market

Recent years have seen a growth in the sub-prime credit market, with loan and credit cardcompanies targeting people on low but steadyincomes from employment – including peoplewith impaired credit histories.

Payday loans, for example, are generally onlyavailable to full-time workers and require a bankaccount and usually a cheque guarantee card aswell. The quantitative analysis carried out byPolicis found that only 14% of people living inthe poorest fifth of UK households had a chequeguarantee card, although this was higher amongthose with a full-time wage than it was amongthose without one. Overall, only 5% of themwere both in full-time employment and had acheque guarantee card.

Similarly, sub-prime credit cards and personalloans from new entrants to the sub-prime marketare also largely aimed at people in steady workwho have a poor credit history. Like paydayloans, sub-prime credit cards are in their infancyin the UK, but the scope for further marketpenetration is considerable (Datamonitor, 2004).Most of the new entrants that offer sub-primepersonal loans (with the exception of paydaylenders) have a minimum loan size that exceedsthe amount that people on low incomesgenerally want to borrow. The sub-prime marketsfor car loans and secured loans for debtconsolidation are the most developed.

There was evidence both from the focus groupsand the interviews with lenders that these newplayers are attracting some of the better-off homecredit and mail order customers. Survey dataprovided by Policis also indicates that around athird of all home credit customers in the UK nowhave credit cards, some of which will be fromsub-prime card issuers. This was supported bythe focus groups we held. The loss of moreprofitable customers to these new entrants hasundoubtedly contributed to the decline of theagency mail order and home credit markets inthe UK.

In response to these changes, some of the homecredit companies have been moving away fromtheir traditional market of small loans collectedon the doorstep. One of the companies we

Lending to people on low incomes

24

Affordable credit

interviewed estimated that, over the past 10years, home credit has fallen from about 80% tounder 20% of its total business. The remainder ofits business is derived from larger loans,including car loans, which are repaid by monthlydirect debit.

Similarly, another lender has decided to focus onlending to people in employment, as they usuallywant larger loans and are able to repay them bymonthly direct debit. They also offer securedloans for home improvements. They estimate thatabout half of the money they collect inrepayments is paid by direct debit; the rest iscollected at the customer’s home. Even so, threequarters of their customers still have repaymentscollected – reflecting the smaller amountsborrowed by home collection customers.Because they tend to be better off, customerspaying on direct debit have default rates that arehalf those found among people paying throughhome collection. Customers who cannot managedirect debits may move onto home collection.

When companies diversify in this way, they oftendevelop risk- and cost-based pricing structures.So, for example, customers wanting to borrow£1,000 or more, who also make the loanrepayments by monthly direct debit, pay thelowest interest rates. APRs on loans to thesecustomers can be as low as 19.9% if the loan hasbeen set up through a call centre. At the otherextreme, a customer with a £500 loan who hasthe payments collected from their home mightpay 80-90% APR. Traditionally, home creditcompanies have had a high degree of crosssubsidy between customers, with the poorestborrowers being the beneficiaries. Further movestowards cost-reflective pricing can only increasethe charges that poor people have to pay in thecommercial market.

Another home credit company has experimentedwith a sub-prime credit card that is designed towin back customers they may have lost to newentrants to the sub-prime market. Like the loansoffered by this company (and unlike other creditcards), there are no additional charges if acustomer goes over the credit limit or misses aminimum payment. These are included in theoverall charge for credit and are reflected in anAPR that is higher than other credit cards,including those in the sub-prime market. Thecompany is also piloting a stored value card forpeople who are reluctant to use a conventional

credit card but prefer structured repaymentscollected from their home.

A further consequence of the increasinglycompetitive nature of the sub-prime market hasbeen a reduction in the number of traditionalproviders, and greater concentration of businessin a small number of companies. The recentmerger of GUS and Littlewoods under March UKLimited has reduced the number of companiesrunning agency mail order catalogues from fourto three, and left the newly merged companywith 71% of the total UK agency cataloguemarket. Although investigated by theCompetition Commission, the merger wasallowed to go ahead because of the expansion incredit provision generally (CompetitionCommission, 2004)9. The merger has,undoubtedly, restricted choice for the poorest ofmail order catalogue users who do not haveaccess to this wider market.

Similar changes have taken place in the homecredit market, with evidence of marketconsolidation towards the four largest companies(Datamonitor, 2004). As mentioned in Chapter 1,in its preliminary review of the home creditmarket following the National ConsumerCouncil’s super-complaint, the OFT found thatcompetition among home credit lenders seemedto be restricted. Consequently, it decided toconsult on a market investigation reference to theCompetition Commission (OFT, 2004a).

In other words, it is clear that widening access tocredit is continuing to benefit the majority, but atthe expense of choice among those on thelowest and least stable incomes. It is thesepeople – who either have no earned income atall or at best sporadic or part-time earnings –who constitute the major market for moreaffordable credit. We explore this further in thefollowing chapter.

9 In addition, the two parties told the CompetitionCommission that “had the sale not occurred, GUS wouldhave wound down its home shopping and home deliverybusinesses” (Competition Commission, 2004, p 34).

25

4

A number of points are clear from the earlieranalysis. First, in the credit market high riskmeans high cost, which translates either into highcharges for the customer or high subsidies.Second, the highest costs are incurred in theprovision of credit to people on the lowestincomes, partly because these borrowersrepresent a high risk and partly because the fixedcosts of lending are high relative to the typicalloan size. Third, the need for affordable credit isgreatest among those who are not in steady full-time employment. These are the people whooften need to borrow for day-to-day needs andessential household goods. They cannot gainaccess to the cheaper end of the sub-prime creditmarket, let alone borrow from mainstreamlenders. And they are least able to save regularlyin order to borrow from a credit union or othersavings and loans schemes.

In this final chapter we look at the numbers ofpeople who might benefit from more affordablecredit and the sums of money involved, andsummarise the key features of the type ofaffordable credit that is needed. We then assesswhether competition can deliver what is neededand the potential impact of existing policyinitiatives. We conclude with some proposals formaking affordable credit available to people onlow incomes through commercial lenders;through not-for-profit organisations, such ascredit unions and community-based loanschemes; and, finally, through changes to theSocial Fund.

Widening access toaffordable credit

The extent of need for affordablecredit

To explore the extent of potential need for moreaffordable credit we have looked at theborrowing behaviour of two groups of working-age people10. Our more liberal estimate is basedon the 6.2 million people aged between 18 and64 who live in the poorest 20% (quintile) of UKhouseholds and could not meet modestadditional expenditure without borrowing; ourconservative estimate looks at the 3.3 millionpeople living in these households, who lackready access to the mainstream credit market inthe form of an overdraft or credit card.

Looking first at our liberal estimate, around 6.7million adults (aged 18-64) live in householdswith incomes in the lowest income quintile. Thegreat majority of these (6.2 million) have littleleeway in their budget, saying that they need toborrow at least occasionally, would find itdifficult or impossible to raise £200-£300 in anemergency without borrowing or would find itdifficult or impossible to save £500 for a specialpurpose. Not all of them had actually needed touse commercial credit – an estimated 1.8 millionhad done so in the previous year (including mailorder) and their commercial borrowing totalled£1.9 billion.

Much of this borrowing was from mainstreamlenders, with around 800,000 people borrowing£1.1 billion from mainstream sources in the form

10 This analysis was undertaken by analysts at Policis. Theanalysis focused on people of working age, as they tend tomake the heaviest use of credit (see Chapter 1). If peopleaged 65 and over were included in the analysis, theestimates would clearly be higher.

26

Affordable credit

of personal loans, hire-purchase finance andcredit and store cards. The rest was from high-cost lenders11, with 1.1 million people togetherborrowing £0.8 billion. The main sources of high-cost credit they had used were:

• home credit companies, from which 500,000people on low incomes had borrowed £0.29billion; and

• mail order catalogues, with 500,000 people onlow incomes borrowing £0.42 billion.

Some of these people on low incomes (andpeople in full-time work in particular) had fairlyready access to mainstream credit in the form ofan overdraft or credit card; others were opposedto borrowing money except from family andfriends. In our more conservative estimate ofneed we make allowance for these two groups,and also tighten our definition to those whowould find it very difficult or impossible either toraise £200-£300 in an emergency or to save £500for a special purpose.

Using this conservative definition, 3.3 millionpeople have a need (and are willing) to borrow

but do not have ready access to credit frommainstream lenders. The great majority of them(2.8 million) live in households with either noearned income at all or their only earnings arefrom occasional or part-time employment. Inother words they are, as the focus groupsconfirmed, disproportionately drawn from peoplein workless households. About a third of them(1.1 million) are also credit-impaired, wouldalmost certainly find it difficult to access creditand arguably ought not to be borrowingcommercially at all. They include people with ahistory of bad debt, who have a county courtjudgement, have set up an Individual VoluntaryArrangement with their creditors, have beenmade bankrupt or had a home repossessed orsay that they have a serious adverse credit ratingwith the credit reference agencies. Almost all ofthe people who are credit impaired (1 million)do not have an income from full-timeemployment coming into their home.

Among those with no ready access to mainstreamcredit, the most common source of borrowing inthe past year was the Social Fund, used by 1.27million people. In addition, around 1 million ofthem had borrowed from commercial lenders(including mail order companies), to the tune of£0.75 billion. Not surprisingly, the majority ofthese credit transactions involved borrowingfrom high-cost lenders (750,000 peopleborrowing a total of £0.37 billion). Again, the

Table 4.1: Overview of liberal and conservative estimates of borrowing among people on low incomes in theUK

Liberal estimate Conservative(6.2m) estimate (3.3m)

Borrowed commercially in past year (including mail order):Number of people 1.8m 1mTotal amount borrowed £1.9bn £0.75bn

Borrowed from mainstream lender in past year:Number of people 0.8m 0.25mTotal amount borrowed £1.1bn £0.38bn

Borrowed from high-cost lender in past year:Number of people 1.1m 0.75mTotal amount borrowed £0.8bn £0.37bnOf which:Borrowed from home credit company

Number of people 0.5m 0.4mTotal amount borrowed £0.29bn £0.2bn

Borrowed from mail order catalogueNumber of people 0.5m 0.25mTotal amount borrowed £0.42bn £0.17bn

11 This includes home credit loans, shopping vouchers, goodsbought on rental purchase, payday loans, loans from apawnbroker or goods bought on credit from a mail ordercompany.

27

main sources of high-cost credit used were homecredit (400,000 people borrowing a total of £0.2billion) and mail order catalogues (250,000people taking on credit totalling £0.17 billion).And, even though they had no ready access tomainstream credit in the form of an overdraft orcredit card, 250,000 people had borrowed £0.38billion from mainstream providers in the pastyear.

Returning to our more liberal estimate, peopleon low incomes borrowed around £0.29 billionfrom home credit companies in 2003. A broadestimate of the interest and other charges payableon these loans is around £0.15 billion12. Inaddition, they borrowed a further £0.42 billion tobuy goods from mail order catalogues. Pricemark-ups vary according to the items boughtfrom mail order catalogues, but we estimate thatthese might amount to between £0.05 and £0.1billion13. In other words, people living in low-income households paid between £0.2 billionand £0.25 billion extra for their credit in 2003.About half of this cost was borne by people withno leeway in their budget and very constrainedaccess to credit.

Pulling this information together, we see that upto 6.2 million people aged 16-64 on low incomescould not meet fairly modest expenditurewithout having to borrow, and in the course of ayear 1.8 million of them had borrowed moneycommercially. A significant number of theseborrowers (1 million) were people with veryconstrained access to credit, so that 750,000 hadneeded to use a high-cost lender.

These estimates are, however, likely to understatethe potential demand for more affordable credit,for three reasons. First, they do not includepeople who have a need to borrow but becauseof changes in the market find it increasinglydifficult to access credit, even from high-costlenders. Second, more people may be attracted touse credit if it became more affordable. Thiscould include, for example, people who currentlyonly borrow from their friends or family. Third,the estimates do not include pensioners,although levels of borrowing among older

people tend to be much lower than among theworking-age population.

The type of credit needed

The main need we have identified is for smallfixed-term cash loans, without the requirement ofsecurity in the form of savings or valuables.People on low incomes want affordable weeklypayments with no hidden or extra charges. Theylike automatic payments, but are wary of directdebits as they carry the risk of high bank chargesshould they fail. The certainty of direct deductionfrom benefit is much preferred and many users ofhome credit like having repayments collectedfrom their home for the same reason. They alsowelcome the facility to reschedule loans shouldthey encounter temporary financial problems. Inother words, potential borrowers want to reducethe likelihood of defaulting, but theirrequirements inevitably add to the costs ofborrowing, whether these are passed on to themor met by subsidies.

The key to lending to people on low incomes ismanaging the risk of default in the most cost-effective way. This means careful recruitment,minimising the risk of non-payment, and repeatloans to defray set-up costs. Most lendersrecognise the need to accept weekly paymentsand either retain an element of control over therepayments or accept security to underwritethem. The most common method of repayment ishome collection; while direct debits are cheaper,they can result in higher levels of default amongthose on low or unstable incomes. There is ageneral acceptance that the majority of borrowersneed to reschedule their loans from time to timeand many lenders in this market do not levyadditional charges for doing so.

That said, none of the existing sources of creditfully meets the needs identified by people onlow incomes themselves. Home credit comesclose to doing so, but the charges are high andsome people are deterred by home collection.The Social Fund, likewise, meets many of theneeds, but repayment levels tend to be high. Thepossibility of rescheduling Social Fund loans isnot well known and, in any case, is not entirelystraightforward. Community-based loan schemeshave the potential to meet the need, but access isrestricted and repayment methods do not always

Widening access to affordable credit

12 See information on charges by home credit companies inJones (2002).

13 See information on mail order catalogue mark-ups inKempson and Whyley (1999a).

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Affordable credit

meet people’s desire for ones that reduce thelikelihood of default.

Will competition deliver moreaffordable credit?

As we have seen, competition is deliveringcheaper credit to people in steady full-time, low-waged employment. This raises the possibilitythat, given time, competition will deliveraffordable credit for all. There are, however,good reasons to doubt that it will.

Two trends are discernable in the sub-primecommercial market. The first of these is the movetowards risk-based pricing, including amongsome home credit companies. As a consequence,people with steady, if low-waged, employmentcan now access cheaper credit provided they canmanage to make monthly repayments by directdebit. In contrast, all the home credit companieswe interviewed indicated that there is a group ofpeople they could only serve through the muchmore costly means of weekly home collection.Concerns about lack of competition in the homecredit market have resulted in the OFT’s decisionto consult on whether a referral to theCompetition Commission is required.

The second trend is for new types of lending,such as rental purchase, to have low APRs buthidden additional costs. Taking these costs intoaccount, it becomes clear that the total charge forcredit is no lower than other sources such ashome credit – indeed it can actually be moreexpensive.

Lenders in the not-for-profit sector offer smallloans and interest rates that are a good deallower than those in the commercial market. Butthey have yet to offer any real competition to thecommercial lenders. The credit union movementhas grown appreciably in recent years but, likethe commercial market, the bulk of that growthhas not been among people on the lowestincomes.

Greater transparency

A number of government initiatives have beendesigned to increase transparency and providegreater information to consumers in order to

stimulate competition. These include the OFT’sprogramme of work on consumer education andthe FSA’s national strategy to raise levels offinancial capability. In addition, regulations laiddown as part of the review of consumer creditlegislation cover the form and content ofadvertisements for credit (including theprominence of the APR), the mandatorydisclosure of specific pre-contract informationand the provision of key financial and otherinformation in a standardised format in consumercredit agreements (see Chapter 1).

Welcome though these developments are, theyare unlikely to stimulate greater competition inthe credit market serving people on low incomes.First, as we noted in Chapter 2, APRs are a verypoor way of comparing the cost of credit at thisend of the market, largely because lenders differmarkedly in the way that they structure theircharges. As a consequence, buying goods onrental purchase at 29.9% APR can work out moreexpensive than taking a loan at 200% APR from ahome credit company to buy the goods from ahigh street retailer. This is analogous to thesituation with credit cards, where variations inthe structure of charges mean that a card with alow APR may be more expensive than one with ahigher APR (Treasury Committee, 2003). Thesolution adopted in that market has been the useof summary boxes on all pre-contract andpromotional literature, which bring together thekey terms and conditions of the card so thatconsumers can compare one with another. Asimilar approach might also be appropriate forcredit providers generally, and particularly thosethat concentrate at the bottom end of the market.In this case, the summary box might usefullyinclude:

• total cost of credit of typical loans of typicaldurations;

• APRs of typical loans of typical durations;• costs not included in the APR, such as

insurance policies that may be required toaccess a loan – again related to typical loansof typical durations;

• warnings of possible price mark-ups;• default charges and when they are levied;• restrictions on access, such as full-time

employment, possession of a cheque book,and the need for savings or other forms ofsecurity.

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There would also be value in bringing thisinformation together in comparative tables, in theway that the FSA currently does for otherproducts. While much of this information couldbe collected at a national level, it would need tobe adapted at a local level by adding informationabout not-for-profit lenders. This might help tohighlight the low-cost credit available in the not-for-profit sector but its potential for opening upcompetition from this sector is debatable. First,there is the patchy geographical coverage of not-for-profit lenders. Second, their growth will berestricted by constraints on access to capital.Third, given current levels of subsidy, anyserious attempt at stimulating competition fromnot-for-profit lenders would almost certainly raiseissues of state aid and anti-competitivebehaviour. These points are discussed more fullylater in this chapter.

Data sharing

Another option for widening access to credit hasbeen proposed by the DTI’s Taskforce on Over-indebtedness, among others. This is for thegreater sharing of data by creditors through thecredit reference agencies, so that it includespeople who currently find it hard to demonstratetheir ability to pay. Many of the lenders whotook part in this research felt that credit referencedata is not sufficiently predictive to justify thecost associated with its use. The quality of thedata about low-income consumers has, however,improved greatly in recent years. As aconsequence, all mail order companies andabout a dozen credit unions now lodge and usethe full credit reference data (that is, non-defaultas well as default information) to inform theirlending decisions. Some have even negotiatedlower fees for small loans, although cost remainsan important deterrent for others who specialisein low-value loans. The quality andcomprehensiveness of the data would be greatlyenhanced if other lenders lodged default andnon-default information with the agencies. Mostnotably, this would apply to the large homecredit companies and to the Social Fund,although in both cases the situation is notentirely straightforward.

As well as the obvious benefit to other lenders,the DWP could benefit by having access todetails about the totality of a Social Fundapplicant’s borrowing, to inform both the

decision to lend at all and the level ofrepayments. There are, however, concerns thatlodging Social Fund information could breachdata protection legislation, but these may beunfounded. Although the credit reference recordsof individuals include details of each creditcommitment they have, the source of these loansis anonymised. Only the data subject can accessinformation about the sources of borrowing;lenders only know which loan they havesupplied.

With home credit companies, the problem lies inthe definition of default, since most loans arerescheduled a number of times. If eachrescheduling were lodged as default, this mighthave the effect of restricting access to otherforms of credit, rather than widening it. To getaround this difficulty, the home credit companiesthat use credit reference agency data only lodgeinformation on accounts that have been passedfor debt recovery.

New initiatives have been developed in the US tocapture non-traditional measures of willingnessto pay. These enable people with minimal or nocredit histories to substitute a history of rent,utility, phone, insurance or health care paymentsfor traditional measures of creditworthiness(Belsky and Calder, 2004). At least one of theUK credit reference agencies has investigated thisapproach and concluded that it is better (andpotentially more reliable) to adopt a more directway of obtaining the same information, allowingpeople to consent to their ‘creditor’ passingdetails of their payment history to the creditreference agencies. It could then be shared in thesame way as other data. There are, however,restrictions on water and electricity companiessharing information, except where they supply‘out of area’. Likewise, there are restrictions oncredit reference agencies holding data for rentand Council Tax, because their databases canonly hold and share credit data. They wouldneed to set up a separate database for thisinformation and have a reciprocity agreement topermit linkage to the credit reference data. Thereis a precedent for this, which allows businessand personal credit data to be used reciprocally.

An alternative approach would be for consumersto be given a ‘portable credit history’ by theircreditors, either on request or on completion ofan agreement. This would provide consumerswith a full history of the repayments they had


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Affordable credit

made on that agreement. Making the provision ofcredit histories mandatory, however, wouldincrease the cost of lending and could exacerbatethe problems of financial exclusion for peoplewith poor repayment histories.

Like the issue of transparency, greater datasharing might help but will not solve theproblem of access to affordable credit. Indeed,there is a real danger that the increased use ofcredit reference agency data will exclude morepeople from the credit market, as credit providersuse the information to ‘cherry-pick’ theircustomers. Moreover, if it became mandatory forcredit providers to lodge credit reference agencydata, the charge for credit to the customer wouldbe likely to increase significantly. Such a movewould have a particular impact on small lenderswho, unlike large mainstream lenders, lack thebargaining power to negotiate price reductionsfrom the credit reference agencies. This in turncould have the effect of distorting competition.

Lending practices in the home credit industry

In addition to the issues of transparency and datasharing, the OFT has highlighted a number ofother lending practices in the home creditindustry that they consider could “prevent,restrict or distort competition” (OFT, 2004a, p 1).These include the use of step-up loans that, aswe have seen, are widely used as a method ofassessing and managing risk in the low-incomecredit market. This practice may impedeswitching between credit providers as someoneswitching to a new lender may only be able toborrow small sums of money until they havebuilt up a credit history. It could, however, beresolved through greater data sharing or the useof portable credit histories as discussed in theprevious section.

Another concern raised by the OFT relates torefinancing or ‘rollover’ loans that tie customersto their existing credit provider. This practice hasgiven rise to widespread criticism, not least fromcustomers themselves. As we discussed inChapter 3, lenders in the low-income creditmarket are unable to recoup the set-up costs onsmall loans in the short-term and therefore seekto build up a long-term relationship withcustomers. But not all of them do so throughrefinancing and it is difficult to justify thecontinued use of this practice.

As mentioned earlier (page 7), following a periodof consultation, the OFT referred the supply ofhome credit to the Competition Commission forfurther investigation in December 2004.

The potential impact of existing policyinitiatives

A number of other policy initiatives may have animpact on the availability of more affordablecredit, most notably the changes to theextortionate credit legislation outlined in theconsumer credit White Paper; the regulation ofcredit unions by the FSA from 2002; and recentchanges to the Social Fund.

Extortionate credit

The people most likely to end up withextortionate credit bargains are those who havethe highest risk of default, including peopleliving on very low incomes and people with ahistory of bad debt or county court judgements(Kempson and Whyley, 1999a).

As discussed in Chapter 1, a ceiling on interestrates has been heavily promoted in the UK as ameans of tackling extortionate credit. On thesurface, this is a simple and attractive idea thatought to benefit people on the lowest incomes.This research has shown, however, that there arehigh costs associated with lending to people onlow incomes who have a high risk of default. Aninterest rate ceiling could do nothing to reducethese costs. Instead, the APR would be reducedby displacing these costs elsewhere, for examplein the form of charges for default – the last thingthat low-income borrowers would want. It is alsolikely that more credit would become tied to thepurchase of goods and consumers would befaced with high price mark-ups as retailers seekto recover the costs of supplying credit. Both ofthese would result in the total costs of borrowingbeing less transparent. Finally, there is a dangerthat lenders would move out of this marketaltogether, leaving poor people even more preyto unlicensed lenders.

Alongside research commissioned by the DTI onthe impact of interest rate ceilings in othercountries (Policis, 2004), this provides furthersupport for the government’s decision not to

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introduce an interest rate ceiling as part of itsreview of the Consumer Credit Act.

The government White Paper on the reform ofthe Consumer Credit Act includes proposals towiden the current definition of an extortionatecredit bargain to include unfair terms andpractices as well as the cost of credit. Unfairpractices could include the lender misleading orcoercing the borrower by using pressurisedselling techniques or the use of aggressive debtcollection. In assessing whether costs are fair ornot, the level of default interest, charges andcosts will be taken into account as well as theoriginal cost of credit. In addition, unfair credittransactions will be handled by a new alternativedispute resolution system operated by theFinancial Ombudsman Service, a move designedto make it easier for individual consumers toseek redress (DTI, 2004b)14. These proposalswere included in the Consumer Credit Bill whichwas introduced in the House of Commons inDecember 2004.

Together, these reforms should produce a moreeffective means of tackling extortionate creditand exposing unfair costs and practices. If casesagainst lenders are upheld, they may be forced torevise their costs, terms and conditions.Borrowers would then benefit from lower costsand a more transparent market. Alternatively,lenders who are found to be engaged inextortionate credit practices may move out of themarket altogether, along with others who fear therisk to their reputation that a challenge wouldbring. This may have a disproportionate impacton small lenders and, as a result, could introducesignificant competitive distortions, particularly inlocal credit markets.

In addition to its reform of the extortionate creditlegislation, as mentioned earlier the governmenthas launched a pilot enforcement scheme to dealwith cases of illegal moneylending, with the aimthat more cases will be brought to court (seepage 7). As the extent of unlicensed lending inthe UK is not accurately known, it is difficult toassess the impact that this will have on low-income borrowers. While a clampdown on illegallending will help the most vulnerable borrowers,

it will not increase the availability of moreaffordable credit, and may put greater pressureon the Social Fund for those who are eligible touse it.

Regulation of credit unions

From July 2002, credit unions in Britain havecome under the regulation of the FSA. As aresult, the financial requirements for creditunions are more rigorous, as are the standardsfor key staff running credit unions. In addition,credit union members now enjoy greaterconsumer protection should their credit unionbecome insolvent or if they have an unresolvedcomplaint against their credit union.

As well as providing greater protection formembers, the aim of bringing credit unionsunder a tighter regulatory regime was to enablethe credit union movement to strengthen andexpand. There have, however, been casualties.Some smaller credit unions have closed, whileothers are expected to merge (Datamonitor,2004). Consequently, the number of registeredcredit unions fell from 686 in 2002 to 665 in2003.

The Social Fund

For those who are eligible, the Social FundBudgeting Loan scheme is an important source ofborrowing. As discussed in Chapter 1, thegovernment has allocated an additional £90million to the discretionary Social Fund budget asa whole15 over the three years to 2005/06. Thefirst instalment of £20 million was made in 2003/04, divided equally between loans andCommunity Care Grants. During the year afurther £20 million was added to the loansbudget, funded by an increase in loan recoveriesand an underspend carried forward from theSocial Fund account of previous years. Togetherthis brought the total gross loans budget for2003/04 to £578 million; and the CommunityCare Grant budget to £118 million. Analysiscarried out for this study by Policis indicates that,although it will help increase access to the SocialFund, the additional £90 million still falls short of


15 As well as Budgeting Loans, the discretionary Social Fundcomprises Crisis Loans and Community Care Grants.

14 The Financial Ombudsman Service will not, however, dealwith price issues (that is, interest rates or APRs), as these areconsidered to be part of the commercial judgement of thelender.

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Affordable credit

the amount that is needed. This is discussed inmore detail later in this chapter.

Other recent changes to the Social FundBudgeting Loan scheme that have beenannounced include a reduction in the standardrepayment level from 15 to 12% of income,making loans slightly more affordable, and theend of the ‘double debt’ rule, which has been asource of confusion for users of the scheme (seeChapter 1). Administrative changes have alsobeen implemented to try and ensure thatresources are targeted at those who have thegreatest needs. These changes will undoubtedlymake a difference to users of the Social Fund. Tomake the Social Fund more comparable withother sources of credit, however, repaymentlevels would need to be reduced further, tobetween 5 and 10% of income.

Other options for widening access toaffordable credit

Customer loyalty and resistance to switchingamong low-income borrowers make thedevelopment of a completely new credit productimpractical. A more effective approach is to buildon the providers that already exist: the homecredit companies and other sub-prime lenders;credit unions and other not-for-profit loanschemes; and the Social Fund. We did not,however, set out to identify the ‘best buy’ amongthe sources of credit potentially available topeople on low incomes. Instead, we have tried toidentify the potential for widening access tomore affordable credit through reducing the costof commercial credit, increasing the availabilityand sustainability of not-for-profit lenders andextending access to the Social Fund.

Reducing the cost of commercial credit

Finding a way of reducing the costs of lending ina high-risk market should lead to lower chargesfor borrowers. It could also widen access byencouraging firms back into this market that havecurtailed their lending to low-income borrowers.Of all the options this would, potentially, havethe largest impact given the heavy reliance onhigh-cost commercial credit by people on lowincomes.

The round-table meeting focused on the scopefor reducing the cost of credit, without increasingthe risk of default. Three main areas of possiblecost reduction were discussed:

• set-up costs, including administrative costs ofrecruitment and setting up the loan, andscreening applicants;

• costs of administering repayments; and• other costs associated with managing risk.

This discussion showed that the scope forreducing costs is limited and lies mainly inminimising the costs of managing risk, throughthe frequency and method of payment collection:

• moving to monthly rather than weeklyrepayments; and

• using automated payments rather thancollecting the money in person.

The scope for moving to monthly paymentsseems to be limited. People on benefits usuallyreceive their income weekly or fortnightly; only avery small proportion are paid monthly.Consequently, most people on low incomeschoose to budget by the week and, as we saw inChapter 3, given the choice they would repaytheir credit commitments the same way. Somelenders have found that monthly payments cangreatly increase the risk of default among peopleon the very lowest incomes.

There is, however, some scope for moving toautomated payments, but it would mean puttingsafeguards in place to minimise the risk ofdefault. Two options were discussed ininterviews and at the round table: directdeduction of loan repayments from benefitincome and direct debits.

Direct deduction of repayments from benefitis very popular among people who borrow fromthe Social Fund. At the present time, in additionto Social Fund loans, payments can also bededucted at source for fines, rent arrears, currentutility consumption and utility arrears. There is alimit on the total sum that can be deducted (25%of income) and an order of priority for creditors.

Adding other loan providers to the list ofcreditors able to access direct deductions seemsan attractive proposition. Closer examination has,however, identified a number of potentialproblems. The present systems could not cope

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with a large increase in the number of directdeductions, and substantial investment would berequired to accommodate such an increase.There would, in any case, be problems collectingpayments when people move off benefit –indeed the DWP is now experimenting with theuse of debt collection agencies to recover moneyowed to it, including money owed to the SocialFund. Finally, there may well be politicalopposition to a government agency collectingpayments for commercial credit companies. Evenif a fee was charged, the government might beaccused of encouraging borrowing amongpeople who could least afford it.Notwithstanding these difficulties, it is apossibility that might usefully be exploredfurther.

The other option is to collect loan repayments bydirect debit. There are two potential difficultieswith this. First, many people who pay the mostfor credit lack a bank account offering directdebit facilities. Without Universal Banking,widening access to cheaper credit in this waycould deepen the effects of financial exclusion.Although the move to paying benefits andpensions directly into bank accounts wasdesigned to increase engagement with banking,the introduction of the Post Office Card Accounthas reduced its impact. This account has verylimited facilities – operating more like a storedvalue card than a bank account. So it does notoffer direct debit facilities nor is it likely to do soin the immediate future. Second, experienceshows that there is a much higher incidence offailed direct debits among people on lowincomes.

As we have already seen, one not-for-profitlender requires all loans to be repaid by directdebit, with some success. Their approach differsfrom previous experiments with direct debits bycommercial providers in two key respects. First,customers can pay weekly if they wish and,second, there is a procedure for dealing withdirect debits that customers know are going tofail.

From the outset, it is made clear to people whoborrow from this lender that they must ensurethat there are adequate funds in their account tocover the direct debit or they will face high bankcharges. If a borrower anticipates that they willhave insufficient money in their account to coverthe direct debit, they are told to contact the

lender four working days before the direct debitis activated. Arrangements are then made eitherto reschedule the loan or for the money to bepaid the following week. Only a minority ofborrowers (around 2% each month) phone to saythey either cannot afford to pay at all or that theycannot afford to pay the full amount. It shouldbe noted that this lender declines six in ten loanapplications, but, even so, the rescheduling rateis not high.

If a borrower develops a pattern of missed directdebits, they will be asked to come in and discussways of rescheduling the loan. If this fails, thensteps are taken to recover the money owedthrough debt collection agencies or, if necessary,through the courts. As this lender has only beenoperating for just under three years, with acurrent loan book of around 800 customers, it istoo early to say how successful this approachwill be. At present, it seems to be workingwithout major problems or too much additionalcost, but it relies heavily on borrowers actingpromptly and responsibly.

An alternative is to remove the risk of default atsource. We explored, with APACS16, thepossibility of direct debit payments beingtriggered by the receipt of wages or benefits intoa bank or building society account, so as tomimic direct deduction at source. At present,customers must nominate a day for payments tobe debited and most people give themselvessome leeway from the receipt of their income.The problem of failed direct debits thereforerelates partly to the unreliability of direct creditsto accounts and partly to people leavinginsufficient income in their account to cover thedirect debit. It is exacerbated by the time takento clear payments into the account, and at leastone of the main high street banks has increasedthe clearing time for cheques paid into its basicbank accounts from four to six days. Payingdirect debits as soon as direct credits havecleared would help tackle these problems.

It would seem that the bank automated clearingsystem (BACS) cannot link direct credits anddebits in the way that we envisage withoutsubstantial further investment. BACS membersare already committed to implementing a majorprogramme to upgrade the system to cope with

16 APACS operates the clearing system for all electronicpayments such as direct debits and standing orders.


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Affordable credit

future demands and achieve faster clearing times.It would be unreasonable to expect them toinvest further in a system that was designedsolely to benefit lenders and borrowers in thelow-income credit market. However, the systemwe envisage could deliver benefits to other BACSmembers, including the banks and buildingsocieties that own it. The benefits would, ofcourse, have to be offset against lost revenuefrom the charges for failed direct debits.

It is clear from our interviews that somecommercial companies would consider movingback to providing loans to people who are not insteady full-time work if loan repayments couldbe collected either through direct deduction or amore certain method of direct debit. Creditunions and other not-for-profit lenders wouldalso be attracted to these methods of collectingpayments as they would reduce their costs andmake financial sustainability more attainable.

One commercial lender, which currently operatesa policy of cost-reflective pricing, estimated thatrepayments deducted at source could reducecharges for a £500 loan to an APR of about 40%.The not-for-profit lender described on page 33also estimated that their loans would be fullysustainable at an APR of 40%. Both figures allowfor face-to-face screening of customers todetermine whether to lend at all and also to set arealistic repayment level. At an APR of 40%, high-risk customers without steady employment couldborrow at rates that are similar to other sub-prime customers.

We therefore feel that the government shoulddiscuss further the practicalities of adapting theBACS system with BACS Payment SchemesLimited. In its Pre-Budget Report in December2004, the government announced that it wasconsidering arrangements whereby commercialand not-for-profit lenders could, in certaincircumstances, apply for repayments to be madeby deduction from benefit where normalrepayment arrangements have broken down (HMTreasury, 2004d). We feel, however, that it shouldalso explore the possibility of making directdeductions from benefit where repaymentarrangements with creditors have not brokendown.

Beyond the ideas for automated creditrepayments, no other suggestions were made forreducing the costs of risk management. There

was little support for loan guarantees among theround-table participants or the credit providerswho were interviewed. There is also only limitedscope for cutting the set-up costs associated withloans. The round-table discussion focused on thepossibility of using automated credit checksthrough credit reference agency searches andcredit scoring, as used in the prime market. Itwas clear that these could only be used as anadjunct to face-to-face screening – which justabout all lenders (commercial and not-for-profit)saw as an integral part of lending in a high-riskmarket (see Chapter 3). Not only does face-to-face contact minimise the risk of default but bothcommercial and not-for-profit companies havefound it essential to building a relationship andensuring repeat use – which is essential whenset-up costs have to be spread across more thanone loan. At best, automated screening could beused to identify the people at the extremes thatwould either certainly be offered a loan or woulddefinitely be turned down. The more expensiveface-to-face screening could then be undertakenonly for people where the lending decision is notclear-cut. The cost savings of greater use of moreextensive external data would, therefore, not belarge.

Widening access to not-for-profit lenders

Despite recent expansion in the not-for-profitsector, we are still a long way from having anational, coordinated and sustainable network oflenders that meets the needs of people on thelowest incomes. The main challenge for not-for-profit lenders is to reach a size where they canachieve economies of scale, including theprovision of centralised back office andaccounting facilities. The suggestions forreducing cost in the commercial sector, discussedearlier in this section, could also minimise thelevel of subsidy required by not-for-profitlenders. This would both increase theirlikelihood of sustainability and ensure morerapid growth of this sector.

The move towards larger, more professionallyrun credit unions with shop-front premises will,in the longer term, benefit existing members andmay attract new members. In partnership withone of the high-street banks, ABCUL has pilotedthe use of PEARLS, a monitoring system thatprovides financial ratios and a business planningtool for credit unions. Initial results from the pilot

35

have been encouraging, with participating creditunions showing increased membership numbersand a higher volume of savings along with adecreased reliance on grant funding. ABCUL hasalso promoted the merger of employee-basedand community credit unions in order to providebetter access for people living or working withinthe common bond of the credit union, and toachieve economies of scale (Brown et al, 2003).

ABCUL has always asserted that the function ofcredit unions is to serve all communities, not justpoor communities. In contrast, communitydevelopment credit unions, which originatedin the US, are targeted specifically at low-incomehouseholds. Among supporters, they are seen asa means of tackling financial exclusion bywidening access to credit and other financialservices (Brown et al, 2003).

Community development credit unions are still intheir infancy in Britain. South East BirminghamCommunity Credit Union, the first communitydevelopment credit union in Britain, waslaunched in 2002. It resulted from the merger ofthree credit unions, and operates from shop-frontpremises. The Birmingham Credit UnionDevelopment Agency (BCUDA) provides backoffice administration and account servicing for itand all other community credit unions inBirmingham.

Despite these positive developments, creditunions will continue to have only limited appealfor people on very low incomes as long assavings remain the basis for securing a loan.Some credit unions have experimented withinstant access loans, which require no pre-savingand are secured by a loan guarantee fund. Asdiscussed earlier, recent research indicates thatloan guarantee funds require close management,which many credit unions are not currently in aposition to provide (Jones, 2003). Other creditunions have made changes to their lendingpolicies to make it easier for members to accessloans, as part of the PEARLS pilot project.

A further hurdle for credit unions is the fixedAPR of 12.68%. Even given the fact that loans aregenerally underwritten by members’ savings,credit unions that want to become morefinancially self-sufficient, and have paid staff, willbe unable to do so while charging this rate ofinterest. They would certainly not be able toprovide instant access loans without heavy

subsidy. Understandably, the idea of creditunions charging a higher rate of interest is acontentious one, and any change would requiresecondary legislation. However, if credit unions(indeed community-based loan schemesgenerally) are to compete seriously withcommercial lenders, they will have to do so froma position of financial sustainability.

The newer community-based loan schemesthat have been established in several areas of thecountry do not require borrowers to save beforethey take out a loan. Their loan capital isprovided through partnerships with banks andthey are free to set their own rates of interest.The organisation interviewed for this studycharged in the region of 24 to 31% APRdepending on the term of the loan and whetheror not the applicant was a new or existingcustomer – rates that attracted criticism fromsome quarters. To be completely self-financing,however, they calculated that an APR of around40% was required. This depended on borrowersbeing able to repay their loans by direct debit.

The challenge for these schemes is again one ofscale. One expert on community financeestimates that they can only be viable if theyserve a population of between 250,000 and500,000 people. This suggests that, at the veryleast, services have to be provided on asubregional basis.

One way for not-for-profit lenders to achieve thistype of scale while retaining a presence in poorcommunities may be through partnershiparrangements. BCUDA has recently developedthe Birmingham Community BankingPartnership, supported financially by one of thehigh-street banks. The aim of the partnership isto bring together the best practices of creditunions and community-based loan schemes inorder to deliver affordable financial services tothe poorest households, including savingsfacilities, credit and budgeting advice(Regeneration and Renewal, 2004).

Alternatively, lenders could work in partnershipwith housing associations, whose tenants areoverwhelmingly on low incomes. Some of thenewer community-based loan schemes alreadyhave this type of arrangement with their localhousing provider.


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Affordable credit

Extending access to the Social Fund

As we saw in Chapter 2, the Social Fund waspopular among eligible low-income borrowers.In the interviews and at the round table, creditorsfelt strongly that people on very low incomesshould not have to borrow money commerciallyto pay for essentials. Instead, their needs shouldbe met entirely by grants and loans from theSocial Fund. There seems to be little justificationfor widening access to the Social Fund to peoplein regular low-waged employment as theyincreasingly have access to less costly credit fromthe sub-prime market. There is greaterjustification for extending coverage of thescheme to people on disability benefits whohave no other source of income.

At present, the Social Fund has a cash-limitedbudget and many people are not aware of thehelp they could receive. In 2003-04, the SocialFund made 1.25 million Budgeting Loans, 1.06million Crisis Loans and 256,000 Community CareGrants. The quantitative analysis carried out byPolicis indicates that about a quarter (anestimated 1.27 million) of people of working age(18-64) living in eligible UK households hadreceived either a Social Fund loan or aCommunity Care Grant in the previous 12months.

Previous research has shown that there isconsiderable unmet need for Social FundBudgeting Loans and Community Care Grants(Whyley et al, 2000; Kempson et al, 2002;Kempson et al, 2004). Policis has attempted toassess the extent of this unmet need using surveydata. To do this, it estimated the total level ofborrowing from all commercial sources bypeople in the lowest household income quintilewho had no full-time earnings coming into theirhome. A total of 440,000 people had borrowedaround £210 million in the previous year forreasons other than discretionary spending. Themajority of these people had used high-costcredit sources.

Arguably, most of this need should have beenmet by the discretionary Social Fund. TheSecretary of State for Work and Pensions hasalready announced that the discretionary SocialFund budget will be increased by £90 millionover a three-year period to 2005/06 (DWP, 2004).Our estimates suggest that this amount would

have to be more than doubled if these needswere to be met in full.

Any further increases to the Social Fund budgetshould continue to be divided between loansand grants. There is a strong argument for betterfunding of Community Care Grants, so that theycan meet the high priority needs of vulnerablemembers of society (Kempson et al, 2004). Thiswould include automatic grants in certaincircumstances, such as when people leaveresidential or institutional care or are rehoused tomore suitable accommodation. Currently, aroundsix in ten of the people who apply for aCommunity Care Grant are unsuccessful andeight in ten of successful applicants received lessmoney than they had applied for – typicallygetting between a quarter and a half of theamount they had requested (Kempson et al,2004).

In the interviews and at the round table weexplored various ways of widening access to theSocial Fund. The one that found most favourwas to capitalise the fund either from generaltaxation or through a partnership with banks orbuilding societies, in much the same way as theycurrently provide loan capital for some of thecommunity-based loan schemes. It is possiblethat individual banks or building societies maybe interested in this proposition. Alternatively, itcould be achieved by the governmentnegotiating an industry-wide initiative, as it didwith Universal Banking Services. This additionalcapital in the fund could be lent interest-free asat present. Alternatively, the Social FundBudgeting Loan scheme could be developed sothat applicants have an initial credit limit that isinterest-free, after which they could borrow ataffordable interest rates.

Conclusion

Whatever shape it takes, some intervention isrequired to ensure that poor people have accessto affordable credit. Left to its own devices, thecommercial market will continue to move awayfrom lending to the poorest people. Many of theproposals to tackle high-cost credit, while well-intentioned, could accelerate this process andleave poor people with even less choice andhigher costs. Linked to this, the CompetitionCommission’s investigation into the home creditmarket is likely to have significant implications

37


for the supply of commercial credit to low-income households in the future.

This study indicates that up to 6.2 million peopleof working age in the UK could potentiallybenefit from the wider availability of moreaffordable credit. The two areas for developmentthat would have the biggest impact are a systemof guaranteed automated payments and furtherexpansion of the discretionary Social Fund. Bothwould have an immediate impact nationwide.They require substantial investment, but thiscould be met through a public–privatepartnership.

Automated payments (through direct deductionsfrom income or direct debits) have the greatestpotential to reduce the costs of both sub-primecommercial lenders and not-for-profit creditproviders. Some commercial lenders haveindicated that they would pass these reducedcosts on to their customers in the form ofcheaper credit. In the case of not-for-profitproviders, reduced costs would makesustainability easier to achieve. Of the twooptions, an improved direct debit system wouldhave wider benefits and would also be moreinclusive.

For the poorest people, the most appropriatesolution lies in further increases to thediscretionary Social Fund budget – either fromtaxation or using capital provided by the banks.Our analysis suggests that these increases needto be substantially more than the government haspledged. There is also a strong case forextending coverage of the Social Fund to peopleon disability benefits who have no other sourceof income.

There is also real potential for meeting needthrough not-for-profit lenders. The movetowards larger, more professionally run creditunions and the prospect of regional community-based loan schemes, run in partnership withcommercial banks, seem particularly promising.The government’s plans to establish a growthfund for not-for-profit lenders, announced inDecember 2004, are also encouraging.

38

Affordable credit

Barton, A. (2002) Unfair and underfunded: CABevidence on what’s wrong with the Social Fund,London: National Association of Citizens AdviceBureaux.

Belsky, E. and Calder, A. (2004) Credit matters:Low-income asset building challenges in a dualfinancial service system, Working Paper BABC04-1, Cambridge, MA: Harvard University JointCenter for Housing Studies.

Berthoud, R. and Kempson, E. (1992) Credit anddebt: The PSI report, London: Policy StudiesInstitute.

Brown, M., Conaty, P. and Mayo, E. (2003) Lifesaving: Community development credit unions,London: New Economics Foundation.

Collard, S. (2002) Ending fuel poverty andfinancial exclusion: A market feasibility report,London: Ofgem.

Collard, S. and Kempson, E. (2003) Pawnbrokersand their customers, London: NationalPawnbrokers Association.

Collard, S., Kempson, E. and Whyley, C. (2001)Tackling financial exclusion: An area-basedapproach, Bristol: The Policy Press.

Community Development Finance Association(2004) Inside out: The state of communitydevelopment finance 2003, London: CommunityDevelopment Finance Association,(www.cdfa.org.uk/resources/index.php).

Competition Commission (2004) March UK Ltdand the home shopping and home deliverybusinesses of GUS plc. A report on the mergersituation, Cm 6102, London: The StationeryOffice.

Datamonitor (2004) UK non-standard and sub-prime lending 2004, London: Datamonitor.

Dominy, N. and Kempson, E. (2003) Can’t pay orwon’t pay? A review of creditor and debtorapproaches to the non-payment of bills, London:Lord Chancellor’s Department.

References

DTI (Department of Trade and Industry) (2000)Switching suppliers: A research study, London:DTI.

DTI (2003) Fair, clear and competitive: Theconsumer credit market in the 21st century, Cm6040, White Paper, London: The StationeryOffice.

DTI (2004a) ‘No interest rate ceiling – for now’,Press release P/2004/315, 26 August.

DTI (2004b) ‘Modern dispute system to resolvecredit problems’, Press release, 18 August 2004.

DTI/DWP (Department for Work and Pensions(2004) Tackling over-indebtedness: Action Plan2004, London: DTI.

DWP (2004) Annual report by the Secretary of Statefor Work and Pensions on the Social Fund 2003/2004, London: The Stationery Office.

Herbert, A. and Kempson, E. (1996) Credit use andethnic minorities, London: Policy StudiesInstitute.

HM Treasury (1999) Access to financial services,London: HM Treasury.

HM Treasury (2004a) Budget 2004, prudence for apurpose: Building a Britain of stability andstrength, London: The Stationery Office.

HM Treasury (2004b) Child poverty review,London: The Stationery Office.

HM Treasury (2004c) 2004 spending review: Newpublic spending plans 2005-2008, Cm 6237,London: The Stationery Office.

HM Treasury (2004d) Promoting financialinclusion, London: HM Treasury.

Johnson, R. and Johnson, D. (1998) Pawnbrokingin the US: A profile of customers, Washington DC:Credit Research Center, Georgetown University.

Jones, P. (2002) ‘Access to credit on a low income’,Unpublished report, Manchester: The Co-operative Bank.

39

Jones, P. (2003) Credit unions and loan guaranteeschemes, Liverpool: Liverpool John MooresUniversity.

Kempson, E. (1996) Life on a low income, York:York Publishing Services Limited.

Kempson, E. (1998) Savings and low-income andethnic minority households, London: PersonalInvestment Authority.

Kempson, E. (2002) Over-indebtedness in Britain,London: DTI.

Kempson, E. and Jones, T. (2000) Banking withoutbranches, London: British Bankers’ Association.

Kempson, E. and Whyley, C. (1999a) Extortionatecredit in the UK, London: DTI.

Kempson, E. and Whyley, C. (1999b) Kept out oropted out? Understanding and combatingfinancial exclusion, Bristol: The Policy Press.

Kempson, E., Bryson, A. and Rowlingson, K.(1994) Hard times? How poor families make endsmeet, London: Policy Studies Institute.

Kempson, E., Collard, S. and Taylor, S. (2002)Social Fund use among older people, DWPResearch Report 172, Leeds: Corporate DocumentServices.

Kempson, E., Collard, S. and Taylor, S. (2004)Experiences and consequences of being refused aCommunity Care grant, DWP Research Report210, Leeds: Corporate Document Services.

OFT (Office of Fair Trading) (2004a) Consultationon a market investigation reference on homecredit (OFT747b), www.oft.gov.uk

OFT (2004b) Response to the super-complaint onhome credit made by the National ConsumerCouncil (OFT747a), www.oft.gov.uk

Policis (2004) The effect of interest rate controls onother countries, London: DTI.

Regeneration and Renewal (2004) ‘Brumcommunity bank secures a £100k boost’, 7 May.

Rowlingson, K. (1994) Moneylenders and theircustomers, London: Policy Studies Institute.

Social Exclusion Unit (1998) Bringing Britaintogether: A national strategy for neighbourhoodrenewal, London: Cabinet Office.

Social Security Committee (2001) Social securitythird report, London: Social Security Committee.

Speak, S. and Graham, S. (2000) Service notincluded: Social implications of private sectorservice restructuring in marginalizedneighbourhoods, Bristol: The Policy Press.

Treasury Committee (2003) Transparency of creditcard charges, London: The Stationery Office.

References

Whyley, C. and Brooker, S. (2004) Home credit: Aninvestigation into the UK home credit market,London: National Consumer Council.

Whyley, C., Collard, S. and Kempson, E. (2000)Saving and borrowing, Department of SocialSecurity Research Report 125, Leeds: CorporateDocument Services.

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Affordable credit

A

Five focus groups were held with low-incomeborrowers aged between 25 and 64, who wererecruited door to door.

The groups included a mix of men and women.Most had dependent children living at home.Two groups comprised low-waged workers inreceipt of Tax Credits; participants in theremaining three groups received Income Support,Jobseeker’s Allowance or Incapacity Benefit.Three of the groups were held in the north westof England, the other two in the south west, inareas that had either a credit union or acommunity-based loan scheme.

The focus groups were carried out with the aidof a topic guide (see later in this appendix). Allthe groups were tape-recorded, fully transcribedand analysed thematically.

Appendix A:Focus groups withlow-income borrowers

Affordable credit for low-incomehouseholds

Focus group discussion guide

• study financed by the Joseph RowntreeFoundation;

• to develop a new source of credit for people wholive on low incomes;

• purpose of group is to begin to identify with youwhat features you would like it to have – andwhat you wouldn’t want;

• will then talk to potential providers and thegovernment;

• and meet again with any of you who areinterested to discuss the outcome of these talks;

• we are interested in hearing everyone’s views –you should not be afraid to say what you think –there are no right or wrong ‘answers’.

41

Introductions

Brief discussion of main sources of credit – people’s use; their attractions and drawbacks (20 minutesapprox)

Mail orderHome creditPawnbrokingSocial FundCredit unionsOther sources?

Sale and buy backRental purchasePayday loans

Ranking key features of affordable credit (20-30 minutes)

Which are essential; which desirable?

Knowing the total cost of borrowing in advanceAffordable repaymentsBeing able to pay off the loan earlyPayment method, including use of payment distribution systemsFlexibility if unable to payProvider (friendly but professional)

Any other essential features?Any features that would be undesirable?What would a ‘silver service’ look like?

Views of other possible features:

Payment protection insuranceWillingness to open current account to access credit

Discussion of total cost (20-30 minutes)

What is more important, affordability or total cost?What about using security for loans (for example savings, valuables)?Which of the features would they be prepared to pay extra for?What is the most they would pay for a ‘silver service’?Where would they make compromises to reduce cost?What is the minimum service they would accept?

CLOSE

Get names, addresses and phone numbers of those willing to meet again

Appendix A

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Affordable credit

Advice UK

Association of British Credit Unions Limited

British Bankers’ Association

British Cheque Cashers Association

Building Societies Association

Consumer Credit Association

Department for Work and Pensions, Family Poverty and Financial Exclusion division

Department of Trade and Industry, Cross-market Interventions

Finance and Leasing Association

HM Treasury, General Insurance, Mutuals and Inclusion Team

HM Treasury, Welfare Reform

HM Treasury, Work Incentive and Poverty Analysis

Mail Order Trade Association

National Pawnbrokers Association

Office of Fair Trading, Consumer Credit Policy

People for Action

Appendix B:Round-table participants

B

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