Affordable credit: what can the UK learn from other countries?

Marie Burton, Consumer Focus Dr Chris Deeming, PFRC, Bristol

Key concepts

‘Affordable credit’

Credit that is affordable and appropriate for people on low incomes

‘Credit exclusion’

Unable to access credit either because it is unavailable or unaffordable

UK context

UK consumer credit market

• €245.2 billion in 2008 • 16.2% of GDP(second highest in the EU) • France 9 % of GDP • Germany 8% of GDP (2008 figures: European Credit Research Institute, 2009 Source: OFT, 2009)

UK context

•

Sub-prime credit markets

: ranking in terms of ‘development’

Member State UK

Ireland Spain Netherlands Belgium Portugal

France

Finland

Germany

Sweden Denmark Norway Italy Greece Austria Source: OFT (2009)

Highly developed Somewhat developed Undeveloped

UK context

Credit exclusion

• 30% no revolving credit, i.e. mainstream overdrafts and credit cards (Eurobarometer, 2008 using 2003 data) • 9 million excluded from mainstream credit (NEF, 2009)

UK context

• Consumers’ options for borrowing if cannot get mainstream credit: • State provision • High-cost credit

UK context

State provision Discretionary Social Fund

: grants and interest-free loans Net expenditure 2010/11 Community care grants: £138.9 m Budgeting loans: £26 m Crisis loans: £104.7 m (DWP, July 2011)

Growth Fund

£137 million in loans between July 2006 and September 2010 - Ended March 2011

UK context

•

High cost credit market

• Valued at £7.5 billion in 2008 including: • £900m payday loans • £600m pawnbroking • £1.26 billion home credit (OFT, 2010)

UK context

Growing consumer demand

• Payday loans estimated at £1.2 billion in 2009 (£0.33 billion in 2006) • H&T pawnbrokers reporting record profits in 2010 "The overall outlook for the pawnbroking industry is good – there is a long way that it can go ... The austerity cuts could certainly increase things.” Steve Fenerty, H&T commercial director, March 2011

UK context

Consumer attitudes

Payday loan users attitudes and views on financial products Form of Finance Payday loan Credit card Overdraft Personal loan Credit Union loan Store cards Car manufacturer finance Pawnbrokers Loan from friends or family Key:  Quick to get           Easy to access           Easy to understand           Cheap           Strongly Agree Strongly disagree Trust myself/gives me control       Want to help me             

UK context

Cost of borrowing Cost comparison of a £300 loan Credit provider

Typical Credit Union (at least 8 weeks saving required beforehand) Credit Unions (offering instant loans) 26.6% APR, paid over 52 weeks Community Development Financial Institution (offering instant loans) Typical home credit company (home collection, APR 272.2%)

Difference between the cheapest and most expensive

Repayment period 52 weeks 52 weeks 50 weeks 52 weeks APR 12.7% 26.6% 47.5% 272.2%

Amount repaid

£318.64

£337.99

£357.50

£546

£227.36

(Source: Making Ends Meet, forthcoming. Adapted from ‘Cost of Cash’ Consumer Focus Wales, 2009)

UK context

Options for reform

• Government consultation on reform of consumer credit • Rate caps – rejected by OFT in High Cost Credit Review in 2010 – total cost of credit cap proposed in Private Member’s Bill in 2011

UK context

Options for reform

• Consumer Focus commissioned PFRC to look at how other countries deal with this issue

Consumer Focus Fleetbank House, Salisbury Square London EC4Y 8JX

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