Taming the sharks

For many people on a low income, debt is a problem that is
spiralling out of control. They often have no access to mainstream
banking services and no option but to turn to high-interest lenders
in times of need. The high cost of repayments can result in
ever-deepening debt from which it can feel impossible to escape.
For many, debt will be just one of the multiple problems they
face.

Debt on our Doorstep (Dood), a national network of 150
organisations, including Church Action on Poverty and the National
Housing Federation, is campaigning for solutions to the growing
problem of financial exclusion in the UK and an end to the burden
of debt on low-income households. It is promoting wide-ranging
changes including a ceiling on interest rates, a change in the
Social Fund and the promotion of credit unions and other community
finance initiatives.

Just under a quarter of all households have no access to the bank
or building society credit that most of us take for granted.
According to recent figures from Datamonitor, eight million people
rely on high cost lenders – a market worth £16bn a year.

New Economic Foundation research found the cheapest rates of credit
for households with no access to banks or building societies was
from pawnbrokers at between 40 per cent to 85 per cent (APR) – 10
to 20 times the Bank of England rate.¹ Doorstep lending
begins at four times the cheapest pawnbroker rates. By comparison,
the APR on credit cards ranges from 5 per cent to 17 per
cent.

Niall Cooper is the national co-ordinator of Church Action on
Poverty and chairperson of Dood. He says: “The Department for Trade
and Industry has put £2m into cracking down on illegal loan
sharks, but this is a tiny proportion of the problem. There needs
to be legislation to limit the rates legal lenders can charge.
Although over-regulation of interest rates might put some lenders
out of business this ignores the problems stemming from the
struggle to repay debt at exorbitant rates.

“It is not just the financial worry,” he adds. “It’s hard to live
with the daily humiliations of dependency and lack of power.”

Credit unions are providing a positive way for people to move out
of debt. They are financial co-operatives, owned and controlled by
members for their own benefit: any surplus is distributed among the
savers. There is a legal ceiling of 12.68 per cent APR on the
interest rates they are allowed to levy, and unlike independent
lenders they are regulated by the Financial Services
Authority.

About 80 per cent of credit unions in the UK are employer-based.
However, these can’t meet the needs of the unemployed and
financially excluded. Some are limited by lack of funding. They
usually expect people to save before they can borrow, so cannot
help those most in debt. However, each has their own policy and
they are increasing in number and scope and many now offer services
comparable to those of high street banks.

In Brighton, for example, the credit union has been operating for
two years and is funded by New Deal for Communities, the government
programme to tackle deprivation in the poorest neighbourhoods.
Funding will continue for a further three years, by which time they
anticipate being self-financing. Borrowers do not have to save
first, but part of the repayment plan includes a savings commitment
of £3 a week to provide a cushion against future
expenses.

“We have made a major impact on many people’s lives,” says manager
Martin Groombridge. “However, to expand and achieve financial
independence we need to escape the notion that this is poor
people’s banking and attract savers as well as borrowers.”

Area regeneration trusts are another option. These charitable
organisations have some government funding, and offer lower cost
loans for essential items or for refinancing debts. However, unlike
credit unions they are not able to accept savings. Their rates are
therefore higher, between 15 per cent and 30 per cent APR,
reflecting the greater level of risk, but still considerably lower
than other moneylenders.

The story elsewhere is encouraging. Significant change has been
brought about by hard-hitting campaigns similar to Dood. In the
Republic of Ireland, for example, half the population is a member
of a credit union and everyone has access to a money advice and
budgeting service (Mabs).

Pat Conaty, senior research associate at the New Economic
Foundation, says: “We are looking for £2m to pilot Mabs
schemes here in the UK. Independent advice is crucial in addressing
long-term debt.”

The Child Poverty Action Group is campaigning alongside Dood to
increase the scope of Social Fund grants to cover expensive
essentials such as replacing a cooker or providing a school
uniform. “The Social Fund totally disregards the needs of the
poorest members of society,” says Beth Lakhani, campaigner with the
Child Poverty Action Group. “Benefits aren’t enough to cover these
costs and repaying loans exacerbates the difficulties.”

But the Social Fund is a limited pot; once spent there is no more
available, regardless of the eligibility or needs of the claimant.
Loans are interest free and repayable directly from benefits but
once someone has a loan they are disqualified from further loans on
the basis they are unable to pay. “There is little wonder people
turn to doorstep lenders,” says Lakhani. “But everyone has the
right to basics, like a cooker or a bed. That’s why we need a
comprehensive system of grants to provide essentials to those who
can’t afford them.”

Dood sites an example where a lone parent’s mental health problems
prevent her from returning to work. Her son needs a new school
uniform but she could only get a £20 education welfare grant.
She also needs a vacuum cleaner, a washing machine and a tumble
drier as she had nowhere to dry clothes. She is repaying one Social
Fund loan at £4.28 per week, so was denied another on the
basis she could not afford it. She has borrowed from a door-to-door
moneylender to make ends meet. Her outstanding debts amount to
£4,000.

“The issue of debt is a complex one,” says Conaty. “Housing is also
a key issue. With greater choices in housing, more people could opt
for furnished accommodation and avoid getting into debt to provide
furniture. This is not being looked at by the government, although
housing associations are beginning to give it consideration.”

Dood is campaigning to attack debt from all angles. “I’m optimistic
about the campaign,” says Cooper. “In the past year there has been
a significant shift of opinion, especially among civil servants.
Now different government departments are all working together.
Previous work on debt didn’t look at poverty, now the two issues
are being addressed together. It might seem obvious, but the most
important factor is low income and finally this is being
acknowledged.

He adds: “This is a very populist agenda. The loan shark is
nobody’s favourite.”

¹ H Palmer, P Conaty,
Profiting from Poverty, New Economic Foundation,
2002

– Citizens Advice Bureaux for independent debt counselling is at www.nacab.org.uk. For the
Consumer Credit Counselling Service ring 0800 1381111 or go to www.cccssecure.co.uk/ew/home.htm
Equigas and Equipower don’t discriminate against households
supplied by meter and those who can’t pay by direct debit. Contact
0845 4560170 or www.ebico.co.uk

Rules for Debt collectors

The Office of Fair Trading issued debt collection guidance
headlined “Debt collectors warned” in July 2003 to debt collection
agencies in England and Wales. The government expects collectors to
follow the spirit and the letter of the guidance and may even
remove a debt collector’s licence if it is breached – which would
put them out of business. Debt collectors should not: 

• Fail to provide details of debts (for example, balance
  statements). 
• Imply legal authority. 
• Pressure debtors to sell property or borrow more to pay off
  debts. 
• Refuse to deal with authorised third parties (for example, care
  staff). 
• Try to collect a debt which is being queried or disputed. 
• Levy debt collection charges which the contract does not
  allow. 
• Visit a debtor who is known to be vulnerable. 

Source: www.oft.gov.uk/News/Press+releases/2003/PN+97-03.htm

Campaign aims

Key areas tackled by the Debt on our Doorstep campaign: 

• Extortionate and irresponsible lending.  
• The failing Social Fund.  
• The promotion of credit unions and other community finance
  initiatives.  
• The social responsibilities of high street banks. 
• Punitive debt recovery methods. 
• Floating cap on interest rates.  
• Funding from government for specialist money advice
  services.

Case study

Julie is a student living in rented accommodation with her
partner and three children. She joined her local credit union and
started saving £5 per week for herself and £1 per week in
accounts she opened for the children.  

A month after she joined the credit union her partner left. As
she had been dependent on his income she immediately struck
financial problems. Loans with a local home credit company were in
her name; the collector was calling every week and she felt obliged
to pay whatever he demanded, leaving her unable to pay her rent and
utility bills. Soon her telephone was disconnected and she was
receiving unpleasant letters. 

The credit union helped put together an income and expenditure
statement, detailing all her creditors and the amount of arrears
owed. With her authority, they wrote to the creditors to get
accurate balances on her accounts and make arrangements for
payments. Most accepted small payments towards the arrears and the
credit union set up a debt management plan to make these payments
on her behalf. They also set up a budget account through which she
paid all her household bills, calculating for her how much she
needed per week. 

The main problem was the home credit loans. She owed £500
but was paying £30 a week at 490 per cent APR. The company was
reluctant to give a settlement balance and tried to make her take
yet more loans. The credit union paid off the home credit debt with
a loan at 12.6 per cent APR which she repaid at £6 per week,
enabling her to start saving a small weekly amount. This gave her
some spare cash for emergencies. 

Julie has now almost cleared her debts. She is saving a little
more each week and is planning to take the children away for a
holiday. 

Case study provided by the Association of British Credit
Unions.