Approximately two and half million people in the UK use home credit, small-sum, short-term loans. These are typically of a few hundred pounds, with repayments made weekly to agents who call at customers’ homes. This credit comes at very high cost, but is popular with customers. Part of the appeal of the product is its simplicity and flexibility. There are no penalty charges if payments are made late or missed and lenders tend to flex collections around borrowers cash-flow.
Around half of such borrowers do not have other credit options, and few have any form of savings safety nets. They thus depend on this type of credit both to spread the cost of major purchases which cannot be afforded out of income and to manage peaks of cash flow.
However, the seizing up of the wholesale markets, on which the home credit lenders rely for their own funding, has created a crisis of credit supply for these most vulnerable borrowers. Currently two of the three major home credit lenders, London Scottish Bank and Cattles are in crisis, one having gone into administration and the other having ceased new lending.
Meanwhile, in this part of the market lending decisions, which were once a matter of agents’ judgements and personal relationships, are increasingly informed by sophisticated information technology. The result is that the remaining lenders are becoming more discriminating in their judgements and less willing to lend to those whose repayment behaviour makes them a more expensive proposition to serve.
Some customers who could previously borrow from the high-cost lenders are now, therefore, finding even this option closed to them. For these borrowers, the loss of access to credit is creating real hardship, leaving individuals with no ready means of managing cash flow emergencies or peaks of expenditure or funding urgent repairs or purchases. Most will simply do without but a proportion will turn to the deeply exploitative and often violent illegal lenders who prey on disadvantaged individuals and communities.
The scale of this new credit exclusion appears to be significant and is fast becoming a real crisis for the most vulnerable borrowers in the market. The numbers losing access to credit would appear to be somewhere between 600,000 and 850,000 and could potentially be much higher than this.
Credit unions and CDFIs, important though they are in the overall effort to combat financial exclusion, simply do not have the capacity nor the national coverage to address a credit gap of this scale. Urgent action is now required, potentially through an increase in Social Fund lending. An alternative solution would be to develop a not-for-profit home credit service.
A new report, commissioned by the Joseph Rowntree Foundation:
-describes the essential elements of a not-for-profit service as identified by customers and lenders. These are home collection, a single price underpinned by cross-subsidy, flexibility with regard to payment and debt recovery for people who genuinely cannot pay.
-develops a not-for-profit business model that adapts the operating experience of commercial home credit providers, covering running costs in year five. Even on a not-for-profit basis, the cost will be high if the service is to be financially sustainable.
-identifies a stand-alone provider as the best option for delivery.
The research was undertaken by Elaine Kempson (PFRC, University of Bristol) in partnership with Anna Ellison (Policis), Claire Whyley, Paul A Jones (Liverpool John Moores University) and Mark Lyonette (Association of British Credit Unions Ltd).