Thanks for the interest

Christmas is coming. You are a parent on a low income, with no
savings. What are you going to do? Plan beans on toast for dinner
and tell the children there’s no money for presents? Or use
whatever credit you can to give your family the sort of Christmas
children expect?

Consumer debt is higher than it has ever been. The Financial
last month reported that household debt now stands at a
record £801bn. The level of debt among people with low incomes
is particularly alarming. A third of those in the bottom fifth of
the country’s income distribution – with less than
£8,730 a year – have debts averaging £3,337.

In a study by economists at Nottingham university,1
largely funded by credit reference agency Experian, a third of a
sample of 4,500 low income families owed for items they had bought
on credit – either credit cards or store cards, but most often
through catalogues or mail order schemes. On top of this half the
families had at least one loan, and one in five said they were
unable to keep up the repayments. Lone parents were especially
likely to be struggling with debt, with more than 40 per cent
behind with at least one utility bill.

Although some people on a low income were able to get bank
loans, many relied on loans from finance companies and money
lenders. A lobby of parliament this month (December) organised by
Debt on our Doorstep – a coalition between Church Action on Poverty
and local community advice organisations – aimed to draw attention
not only to the difficulties low income families have making ends
meet, but also to the cripplingly high interest rates they are
forced to pay for loans. As well as the problem of illegal loan
sharks, poor families rely on licensed home credit firms which
charge high interest rates (up to 280 per cent a year according to
the journal Investors Chronicle) for small unsecured loans, usually
of cash or shopping vouchers. Repayments are collected weekly by a
local agent who comes knocking on the door for their money. The
Nottingham study found that 47 per cent of those who were unable to
keep up with loan repayments owed the money to a finance company,
money lender or “tally man” compared with only 4.5 per cent who
were repaying a bank loan.

Martyn Hancock is an accountant at East Bristol Advice Centre
who advises people on debt. He says: “When it comes to loans people
are as vulnerable to exploitation as they are desperate for the
money.” He recently helped a lone mother of two young children to
clear a debt to a finance company by applying for help to
charities. “She’d got into arrears with British Gas and owed
some other money on mail order purchases. She saw an advert in the
paper and was persuaded to borrow £1,500 to be repaid over
three years. The interest rate meant the total repayment was three
times the initial loan.”

Chancellor Gordon Brown recently announced that the Social
Fund’s capped budget for discretionary grants and loans was
to be topped up by £90m – a significant increase on last
year’s Social Fund spend of £285m but unlikely to solve
the debt problems of people in poverty. Church Action on Poverty
wants the legal definition of extortionate credit reviewed.

Hancock backs this. “It would be nice to have better control
over the moneylenders. The Financial Services Authority should have
some say on credit agreements so when people come to us having
signed a credit contract we could get someone to review whether it
is extortionate. These companies may be doing well by their
shareholders but it’s on the back of people who cannot afford

1 S Bridges, R Disney, Access to Credit and
Debt among Low Income Families in the UK, University of

More from Community Care

Comments are closed.