Trapped in the debt 'spiral'

Poorer people pay heavily for credit, a study has found

As a new report highlights the difficulties poorer people have when making loan repayments, one woman explains how small, fast loans left her facing a huge problem.

The troubles for Kathy, 43, from Huyton, Merseyside, started at Christmas one year.

Recently divorced, with little cash to spare and little time to find any, she found the offer of a doorstep lender hard to resist.

"I was worrying sick about what to get the kids at Christmas and suddenly saw people coming around [offering loans]," she said.

I just tried to blank it out and not look at the figures Kathy Borrowing 'harder' for poor

Once, she borrowed £200 from a doorstep lender with a weekly repayment of £6. By the time she paid off the loan, a year later, she had repaid more than £300.

Another loan, for £400, ended up costing her £700.

"You think it's only another £6, I can manage it. It just spirals so easily and gets completely out of control," she said.

She said she used the money to buy everyday items such as clothing or toys for the children. But there were always new costs to be met.

'Foolish'

By Easter, the children needed new shoes, which meant Kathy needed a new loan.

Kathy thought her repayment would be easy to manage

"I guess I was trying to compensate for their father not being there and so gave them extra things. Now it seems so foolish but it didn't seem like that at the time."

She started getting loans to be able to repay other loans, eventually finding herself £16,000 in debt, including the interest.

"I just tried to blank it out and not look at the figures. Basically I was robbing Peter to pay Paul," she said.

Kathy ultimately joined a credit union, which let her borrow money with a repayment plan that suited her.

Now "on top" of her finances, she works with a group helping others in debt.

There are many still in that kind of situation.

A new study for the Joseph Rowntree Foundation found poorer people often borrowed money at annual repayment rates of up to five times their original loans.

Costs

One of the report's authors, Prof Elaine Kempson, said this was partly due to the higher risk of default from people on lower incomes.

It can cost an awful lot to lend money to poorer people Prof Elaine Kempson Report author

"It's also because there are certain fixed costs in providing a loan, regardless of the size of it," she said.

She said there were also very high costs for lenders who collected money at home, but this was the prefered repayment method for many people on unstable incomes, who disliked direct debits.

"It can cost an awful lot to lend money to poorer people."

Prof Kempson's study found that no existing provider fully met the needs of poorer people.

She said doorstep lenders were among the best options for some, while credit unions would be of little help to those unable to save enough to be eligible for a specially negotiated loan.

People surveyed said they wanted quick, small loans

The report recommended the cost of commercial credit be reduced, either through improved direct debit systems or through a direct deduction of repayments from benefits.

It also advocated an expansion of the Social Fund, a scheme run by the Benefits Agency which offers loans to low income families.

Prof Kempson said the fund, which is already being boosted by £90m over three years, would need to be doubled.

"Whatever shape it takes, some intervention is required to ensure that poor people have access to affordable credit," she said.