Although the UK is no longer in a recession, many people on lower incomes continue to be financially excluded, as they fail to meet strict criteria for lending from incumbent banks, or mainstream lenders.
But this issue has led to loan sharks taking advantage of these people’s financial situations, and it is time for the mainstream financial sector to address the credit vacuum, urges Fair4All Finance, a financial inclusion organisation.
It says that UK banks should consider emulating the success of ‘small dollar loan’ products in the US, which delivers sub-$1,000 loans to lower-income households, in its latest report, and explains that while the UK consumer credit market has grown by more than 50 per cent in the past year, the three forms of credit most commonly available to lower-income customers pre-pandemic now account for just 0.3 per cent of lending, down from four per cent in 2013.
As access to finance continues to reduce, Fair4All Finance suggests that demand is often being met by unregulated and sometimes illegal lenders, as seven per cent of adults (equivalent to 3.3 million people) have used, or believe someone in their household has used, illegal lenders in the past three years.
Around 15 per cent of GB adults are aware of an unlicensed lender operating locally, while 16 per cent of those who declined for regulated credit either turned to a loan shark or knew that someone in their household had, compared to the five per cent who successfully applied for mainstream credit.
Those in lower income brackets who had been refused credit were more likely to borrow from friends or family, or to sell or pawn their possessions, than they were to apply to another legal lender.
Putting a stop to illegal lending
With an aim to stop the growth of illegal lending, Fair4All Finance suggests encouraging innovation from mainstream finance in developing products to address the credit vacuum. While six of the largest eight banks in the US offer such loans, as do many smaller banks, only one major UK bank currently offers a similar product on its website – highlighting a clear opportunity to improve the accessibility of lending.
The financial inclusion organisation also recommends scaling up affordable credit providers, potentially through investment from those mainstream providers who have contributed to the creation of the credit vacuum.
It also says considering whether income maximisation tools (such as benefits calculators and grant finders) should be a mandatory part of customer journeys for those applying for loans.
Niall Alexander, credit and consumer markets lead at Fair4All Finance, said: “Increasingly, lower-income households have few or reducing options when it comes to accessing legal forms of credit, even the most expensive forms.
“In this report, we ask what happens to those people when they need credit and can’t get it. Does their need for credit go away with a refusal? In some cases, they may go without food, sell possessions or make other difficult choices. It is clear that others are enticed, whether by choice or through deceit, into borrowing from unregulated lenders.
“This ought to be a major concern to policymakers, regulators and indeed the financial services sector. We hope that this report encourages those groups to consider practical steps to reshape the credit market and stem the growth of illegal lending.”
