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high cost credit

The following blog was initially posted on LinkedIn in response to news of controls on the rent to own sector announced by the Financial Conduct Authority.  

It has been a busy week at Fair for You, with the news of the rent to own sector facing some curbs on elements of the credit solution that most penalise their customers. I am prompted to blog by some that question whether there is a need for this type of credit.

Maybe no surprise that in my opinion, there is never a need for penal high cost credit, so long as consumer led and better designed solutions are supported.

Fair for You was established and is successful as an alternative to rent to own in providing essential household items to lower income home makers having to use high cost credit. Bearing in mind our average loan is under £400, the estimated saving independently calculated is £527. As this weeks clampdown from the FCA has shown, that cost saving is not about the interest rate, but the design and structure of the entire credit solution.

Before we set up Fair for You, we conducted 2 years of research, exploring what was most needed from credit. Our current offering was designed in response to be highly visible and clear in the terms, with flexibility that accommodates income fluctuations as well as expenditure changes; supportive – delivered with a basic duty of care and affordable.

It is absolutely possible to remove material deprivation through a credit solution: based on feedback from customers who tell us their health and well-being has improved directly as a result of a FFY loan.

The cost to the consumer is based upon how far we can drive out the costs of loan deployment, collection and management of delinquency.

As a CIC owned by a charity we have no profit objective, that takes care of a huge amount of costs borne by customers of high cost credit alternatives.

There are no cash loans available, this is based entirely on significant feedback and our intention to ensure that all of the benefit of the credit we provide remains in the household, whilst empowering the home maker to shop with confidence knowing they can purchase new, quality items and access flexible credit that works for them.

We have built a highly effective bespoke lending solution that includes affordability and creditworthiness assessment based on our in depth knowledge and understanding of our demographic built over 10 years of working in this sector.

We choose good partners – initially Whirlpool, who have committed to ensuring that cost effective purchases can be installed within 3 days, and with free recycling of old products and free delivery across the UK with 1 hour delivery slots including Sundays. That addresses so many of the concerns we identified, from rural poverty, & having to take time off work in households with very fine margins and very high anxiety and reliance on the product.

We have extended our offering consistently, most recently welcoming Dunelm ensuring beds and sofas right across the UK at affordable prices can be delivered. The huge difference on the education and behaviour of a child that wants to go to bed at night because they have a nice bed of their own is feedback that we receive regularly, and never fails to touch all of us.

Essentially this also reduces the cost to the consumer, as we take a commission on every product sold that offsets the interest income we require from every loan we provide.

Most challenging for all credit providers in this demographic, is the need to collect effectively. Aided by the enhancements in payment technology and communications technology driven by the utility sector, again we have found we can drive out substantial costs in delivering, managing and collecting small loans. & perhaps this is the area, I am most proud of the progress we have made in showing that you can collect effectively whilst maintaining support to consumers through difficult situations.

As we would expect, we encounter customers that struggle to maintain payments. Our policy is not to add substantial fees or interest but to try to keep customers on a payment plan that allows them to repay the loan even if its over a longer period. We have no late fees at all, and most customers will switch a plan, to continue paying.

Most of the time, that level of support works. We do not sell on debts, or use bailiffs, so one major step forwards has been the increasing efficiency of the Eligible Loan Deduction Scheme operated by the DWP, which allows us to recover a loan at very low level from customers benefits directly where payments stop completely. That is the lowest cost and most effective solution for affordable credit to be extended in the UK.

It has taken 3 years to develop a solution after 2 years of research – however it is absolutely clear we can reduce material poverty through deploying better designed credit, right across the UK even with very small loans, which are life changing to our customers.

We share widely our research and our experience in having created the first national alternative to rent to own in the UK. We are now working to ensure that Fair for You is available as widely as possible.

We welcome any support to our mission to alleviate material poverty and support low income home makers to avoid having to resort to any high cost credit solution.

Follow Fair for You on Twitter.

Barrow Cadbury Trust supports Fair for You through its social investment programme.  High cost credit is one of the key themes of the Fair by Design movement which the Trust is hosting.  Follow Fair by Design on Twitter

Carl Packman, Head of Corporate Engagement for Fair by Design’s poverty premium movement, looks at the scale of financial inclusion collated and analysed by the Centre on Household Assets and Savings Management’s (CHASM’s) annual briefing paper

Theresa May in 2016 made a very powerful speech demonstrating her willingness to fight against what she called “burning injustices”. She noted that “if you’re born poor, you will die on average nine years earlier than others […] If you’re one of those families, if you’re just managing, I want to address you directly.”

To her party’s conference that year she also said:

“Where companies are exploiting the failures of the market in which they operate, where consumer choice is inhibited by deliberately complex pricing structures, we must set the market right.”

Recognising the plight of poverty, and the extra costs associated with it, is something that unites the political spectrum. The Fair by Design initiative recognises it’s not easy to solve, but it is focusing on solutions not just words.

Poverty is increasing

The Centre on Household Assets and Savings Management (CHASM)’s 2018 Financial Inclusion Monitoring Briefing Paper, demonstrates the scale of the problem.  It starts by celebrating some positive recent developments including falling unemployment and increased wages for full time employees. However, poverty is increasing, both in and out of work, “with those out of work particularly affected by benefit cuts and delays”.

The report shows that poverty has increased since 2010. In 2016/17, 30 per cent of all children and 16 per cent of all pensioners were living in poverty, while 1.5 million people, including 365,000 children, were destitute at some point during 2017.

Poverty is expensive in the UK. As the concept of the poverty premium illustrates, there are extra costs of being in poverty. The cost of credit, for example, becomes higher if you are obliged to visit an alternative provider like a payday lender for borrowing money. The cost of energy is higher if you are stuck on a costlier tariff, and the costs of insurance increase if you live in a particular area.

Figures in CHASM’s report bear out some of those extra costs. For example in 2014–16, nearly half (47 per cent) of the population had some form of unsecured lending, which can include payday loans and other forms of high cost lending, but is most often credit cards.

In addition to high cost credit from the alternative credit sector (e.g. payday lenders, the rent-to-own sector like Brighthouse), the costs of unarranged overdrafts has been particularly hard for consumers:  whilst one million people took out payday loans in 2017 at least 10 million used an unarranged overdraft.

The report finds that those on the lowest incomes are much more likely to be in arrears on utility bills and credit commitments: 16 per cent of those on the lowest incomes (lowest 10 per cent of incomes) were in arrears in 2012/14 compared with only one per cent of those with the highest incomes (highest 10 per cent of incomes).

One issue for those experiencing the extra costs of being poor is not just how much they spend, but the costs of essential products and services becoming totally unaffordable. From the report we see that only six in ten working-age adults had home contents insurance in 2016–17, and we also know that 60% of those earning £15,000 or less per annum have no contents cover. Of those who did not have it, nearly a third said they could not afford it.

Fair by Design’s plans to eradicate the poverty premium             

In Fair by Design’s recent roadmap, charting how we will get rid of all the extra costs of poverty, we set out plans to get rid of the poverty premium. We call on businesses, including all consumer credit providers, to eradicate the poverty premium from all of their products and services to ensure low income customers aren’t paying more for essentials. Fair by Design want the Financial Conduct Authority (FCA) to broaden its regulation of all forms of high cost credit including caps on those not currently covered: overdrafts, rent-to-own, home-collected credit, catalogue credit, and store cards.

Fair by Design want landlords to ensure every new housing tenant is automatically placed on the cheapest energy tariff, to stop them from paying over the odds on their fuel bills, particularly those unaware of the fuel provider choices which exist, and we want employers to support employees on wage advances to help them to avoid turning to high cost credit lenders.

Find out more about the Fair by Design movement on our website and follow its activities on twitter.