WIREDGOV

In recent years, policymakers and the media have focused on the high cost of payday loans, highlighting extremely high interest rates. But the millions who lack access to affordable credit turn to even more expensive options that are potentially more damaging.

By Victoria Boelman, former Head of Research, The Young Foundation

The UK is a society built on the availability of consumer credit. Many of us take it for granted and rely on it to purchase everything from a new home to a mobile phone. For some it is also an important element in simply managing their day-to-day living. Credit can help people to deal with economic shocks like a cut in working hours, smooth the bumps of an irregular income, and spread the cost of high-price items like cars. But an estimated 12 million people in the UK lack access to these forms of mainstream credit.

'Sub-prime' customers are those judged too risky and pushed out into the alternative, more expensive credit market. This is the world of payday loans, doorstep loans (led by companies such as Provident Financial and Morses Club), rent-to-own furniture stores (of which Brighthouse is the market leader) and other options, including pawnbrokers and logbook loans.

In recent years, policymakers and the media have honed in on the high cost of payday loans, rightly highlighting the extremely high interest rates (with APR in the thousands) and the problems caused by them, as well as the common practice of rolling over of loans, and heavily charging those who have defaulted. In 2014 the bubble burst for the booming payday loan industry when the Financial Conduct Authority (FCA) acted to bring in a price cap, dramatically shrinking the market and effectively cutting off thousands of consumers from being able to access this type of credit as lenders tightened their lending criteria. Today, payday loans are a closely regulated product offering loans at a rate which is often more affordable than what even mainstream lenders are offering for small short-term loans.

Yet this unwavering attention on the payday loans industry means that only part of the story is being told. Our research in Wales, funded by the ESRC What Works in Tackling Poverty programme led by the Public Policy Institute for Wales, clearly shows that other forms of high-cost credit are more prevalent, more expensive and often more damaging to many of society's most vulnerable consumers. Doorstep loans and rent-to-own are used by more people, and cost more. This drains money from local economies and limits what parents are able to invest in their children.

High-cost credit customers come from all walks of life, but are most likely to be young families. They are no less likely to be in employment but are often on low pay or 'zero hours' contracts, the 'working poor'. People turn to high-cost credit for a wide range of reasons, from simply making ends meet, to dealing with a 'life shock' such as job loss or bereavement, to paying for Christmas or the 'back-to-school' costs of a young family.