Pete Jefferys of the Co-op party explains why the scrapping of the social fund - is playing into the hands of the legal loan sharks like Wonga and Oakam.
Amongst the more pernicious elements of the government’s welfare reform bill is the effective scrapping of the social fund, an interest free loan facility for the most financially vulnerable. The proposal is for the fund to be cut by 39 per cent and the rest passed on to local authorities without a ring-fence, which of course means that many councils will use the money elsewhere in their much reduced budgets.
The boon for legal loan sharking companies – which lend money at astronomical levels of interest – is obvious. The industry is clearly growing through the economic downturn; just witness the prevalence of new faces on the high street and web.
However since 2008 there has been no information on the size of the high cost credit sector, despite an Office for Fair Trading commitment to look into the issue.
Stories about people ending up in mountains of debt and even homelessness after taking high cost credit are starting to filter into the press. Given the unprecedented squeeze on household incomes currently ongoing and expected well into the future, these cases are likely to increase.
But just how much more expensive is high cost credit than other sources of consumer finance, such as from community co-operatives?
Recent analysis from Barnardo’s suggests there is a huge difference:
What this data does not include, though, is the danger of the debt rolling over and thus accruing the thousands of percent of interest that legal loan sharks charge (APR).
Credit unions, community finance providers owned by their members, cannot charge more than 27 per cent APR and many charge less than this. One leading loan sharking company charges an APR of more than 4,000 per cent.
The industry should be much more transparent about the risks of high interest accruing on loans from certain lenders and the benefits of co-operative financial service providers.
The government should fulfil the spirit of its own child poverty strategy which warns that:
Unmanageable personal debt can drive a cycle of poverty and distress that is very difficult for families to escape.
The Co-operative Party believes that the government should step up action to tackle high cost credit and the spiralling debt it can cause. The government should:
• Implement a strategy to manage the supply and demand of high cost credit – focused on making the industry transparent and supporting affordable alternative such as credit unions. This should include annual assessments of the size, growth and geographical spread of high-cost lending by an appropriate authority.
• Support an easily accessible credit cost comparison website. The money advice service could provide such a service for consumers to compare how much a short term loan costs from all different providers – including credit unions – and highlight the risk of debt accrual from different providers. Current comparison sites fail to highlight these dangers and don’t always include credit unions.
• Look into time-limits on high cost loans to prevent massive debt accrual.
• Follow the lead of the Welsh government and aim to ensure that everyone in the UK has access to a credit union.
At the weekend, Co-operative Party activists and MPs were campaigning against legal loan sharks in Liverpool. We surveyed around 100 residents in the Norris Green area and found that there is huge support for our call for action on high cost credit (over 90 per cent).
We also found that one in three surveyed had not heard of credit unions – testimony that much more can be done to raise the profile of fair and affordable lenders.
Whilst this government presses ahead with callous welfare reforms – such as their aim to scrap the social fund – more and more families are being forced towards high cost lenders. If David Cameron is serious about a more moral capitalism, then he should take action to tackle the most predatory companies of all: legal loan sharks.
The Co-operative Party is campaigning for a fairer economy that puts people before profits. You can join the campaign here.
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• Government needs to find a way to tackle high-cost lending – Johann Lamont MSP, December 2nd 2011
• Ignore Wonga’s spin; they’re still targeting students – Alex Hern, January 13th 2012
• Wonga target students with friendly advice: Take our 4000% loan – Alex Hern, January 11th 2012
• Need for affordable credit ‘big bang’ to aid low income communities – Kevin Gulliver, June 27th 2011
• Public sector mutuals are a good idea but the coalition just don’t get it – Michael Stephenson, November 18th 2010