Credit cost to poor a 'disgrace'

Delegates called for a ceiling on the cost of borrowing

By Louise Greenwood BBC Radio 4's Money Box

The high cost of credit charged to the poor is a national disgrace that urgently needs addressing according to two new reports.

Church Action on Poverty and the left leaning think tank, the new Economics Foundation presented their findings at a conference in London on Tuesday.

Delegates from low income groups across the country then marched on parliament.

They calling for a ceiling to be introduced on the cost of borrowing in the UK, similar to that which exists in the US and several European countries.

There are estimated to be about eight million people in the UK, living on benefit or very low incomes, who find it hard to get bank accounts and access to credit at standard rates.

No limit

There is no limit to the level of interest that can be charged

Under the 1974 Consumer Credit Act, there is no limit to the level of interest that can be charged by licensed lenders operating in the so called "sub prime market".

Lenders like Providant Financial, which is one of the largest, can charge 50% interest on a loan over a year, rates that would be unthinkable at any of the high street banks.

Pat Connerty from the New Economics Foundation, worked on one of the reports.

He said the cheapest loan for unsecured credit he found was 160%.

"The market overall is worth over £3.3bn. For the poorest households we question whether this is a financial service.

"In fact, we believe this is a financial disservice."

Spiralling debt

Susan King from the Hull East of the River Credit Union (HERCU) told Moneybox these licensed credit lenders are the worst problem in her area.

If they were a loan shark, perhaps we could take them to court.

Susan King, Hercu

"What starts out at £100 worth of debt can easily within six months turn into £900. These are legal, so what can you do?

"If they were a loan shark, perhaps we could take them to court."

Damon Gibbons from Leicester City Council Advice Centre told the BBC of one estate in Leicester where this kind of credit lending is rife.

"We found an astonishing amount of people just within two or three roads, people who were on benefit to start with, with incomes of about £150 a week, paying 15 to £20 of that back to moneylenders."

Government consultation

Economic Secretary Ruth Kelly spoke at the debt rally

The Economic Secretary Ruth Kelly, who addressed the conference, said the problem of extortionate credit lending is being examined by the Department for Trade and Industry.

A consultative document is expected shortly.

But Damon Gibbons, like many other delegates, said there is an urgent need for reform now to help the millions of low income households facing a lifetime of spiralling debt.

"We need to look at tighter regulation and making affordable credit more accessible...

"I think there is a very strong case for the UK to go down the route that many other European countries have taken, which is to introduce a statutory cap on the interest rates that can be charged.

"Personally I cannot see why anyone should pay more than £25 back on every £100 borrowed."

BBC Radio 4's Money Box was broadcast at 12pm on Saturday, 7 December 2002.