Feature Article

Rich pickings from the poor

The conviction of the ruthless loan shark John Kiely has highlighted the practices of illegal doorstep lenders. These operate in the shadows, but out in the open and perfectly legal are home-credit companies that charge very high rates of interest and flourish when credit is tight

Even in the credit crunch, well-paid people in good jobs are still finding it difficult to get mortgages or other loans. Small businesses complain that the banks are sitting on money that would otherwise help their successful enterprises to grow. What hope, then, for someone who is on benefits, with a family to support, to get £500 for a new washing machine and a new bed? It’s easier than you might think.

As Provident Financial, the country’s largest home-credit agency, puts it, it’s as “quick as a click”. The company will consider applications from people with a bad credit history, including county court judgments. And if you are prepared to make 23 weekly payments of £32.50 for a £500 loan, you could get away with paying back a total of just £747.50, compared with the £875 you would have to pay back if you chose their option of 50 weekly tranches of £17.50.

But people are willing to do just that. In fact, Provident Financial gained another 100,000 borrowers in the last year boosting total numbers to 2.1 million, which took its pre-take profits from £51.3 million to £53.1 million. And those numbers started to move even before the credit crunch started to bite. But then, if you believe Provident Financial, current economic woes present no problems for those whom it likes to refer to as being on “modest incomes”. Chief executive Peter Crook argued earlier this year in The Daily Telegraph that the credit crunch is primarily a middle-class problem: “In terms of the 40 per cent [of our customers] who are on benefits, it’s no bad thing actually at the moment. It means that the customer’s ability to repay the loans we make is fairly bulletproof. It’s no bad place to be if things are going to slow down a bit.” After all, if you haven’t got a job, there’s not one to lose.

By contrast Paul Nicolson, chair of Zacchaeus Trust, says: “People who take these loans are always in extremis. They are in crisis and the crisis is usually about wanting new school uniforms when their children are being teased in the playground about what they wear. So in autumn the home-credit agencies hover on the doorstep. It’s also about school outings, Christmas and birthday presents.”

Mostly operators in the high-interest but still legal home-credit market work out of the limelight. Paradoxically two well-publicised convictions of illegal loan sharks – one of whom received five years having amassed a fortune of £3 million with the help of blackmail and intimidation – help by directing attention away from them.

The murky world that the illegal loan sharks inhabit is difficult to quantify. The highest estimate, by the New Local Government Network, that some 200,000 people use illegal loan sharks is likely to be an underestimate. These sharks use violence and intimidation to fill their wallets as people’s interest payments balloon arbitrarily.

Peter Richardson, manager of the government-funded London Illegal Money Lending Team, says: “A hundred per cent of the people we have worked with [540 illegal loan-shark victims] have multiple legal debts. People know what they are doing, but they act in a crisis, which could be anything from a marriage breakdown to a sick relative overseas. Before they get to the illegal loan shark, they have worked themselves down the credit ladder: banks, prime loans, building societies, credit unions, home-credit lenders, where they have both been rejected and obtained loans that they cannot repay.”

But why not apply to the Government loan scheme, the Social Fund? This was invented by the Tories in 1988, excoriated by Labour when in opposition then operated by it when in power. However, loans are only for essential items. Repayments are interest-free but they form a sizeable part of the borrower’s benefit payment. On the other hand, home-credit companies such as Provident Financial offer seductively small weekly repayments, no credit checks and the fact that interest, while high, is fixed. Provident Financial has about 50 per cent of the home-credit market – it also has a bank (offering an APR of 39.9 per cent on credit cards) – and two other companies share another 30 per cent of the market. When I checked an online comparison site, eight results for a £500 loan to be paid back in one to two years offered a typical APR of between 128.2 per cent and 325.4 per cent.

It was the lack of market competition, and the then annual profits of £100 million identified in 2003 by the National Consumer Council and Debt on Our Doorstep – a campaign founded in 1999 to fight irresponsible lending – that caused the Competition Commission to set up its inquiry into home credit. It reported in 2006 without, however, proposing a hoped-for cap on interest rates.

Britain is rare among Western countries not to cap interest rates or even offer protection to borrowers. In Poland and Ireland, where Provident Financial also operates, borrowers have a choice of repayment by direct debit, which is much cheaper, or by paying a home credit company to call.

Damon Gibbons, founder and chairman of Debt on Our Doorstep, puts down government resistance to a more robust intervention to its “neo-liberal approach” to credit, which favoured transparency and consumer education. Two reports have also come out against capping. One was from Policis, an independent research agency, for the former Department of Trade and Industry. This argued that capping would lead to a commensurate rise in loan sharks. Gibbons says the report was flawed in its facts, and declared it “a disgraceful piece of research”.

The other research came from the Personal Finance Research Centre at Bristol University, and was published in 2005 by the Joseph Rowntree Foundation. This argued some home-credit lenders were already moving away from serving people on low or unstable incomes. The authors argued that any intervention that accelerated this trend could prove counterproductive, unless there are sources of more affordable credit to fill the gap they leave. The clear implication is what Policis said explicitly – loan sharks will move in.

Apart from capping, other proposals have included access by poorer people to affordable loans and an end to discrimination against lower-income families by banks. Credit unions are often seen as central to any solution but they are patchy in their size and financial backing. While the Government has a £30-million growth fund to stimulate the unions, this sum is inconsequential compared to the resources of a company such as Provident Financial. Yet, in the US credit unions thrive. The Community Reinvestment Act, passed in 1977 to stop financial institutions discriminating against low-income households, has seen lending to those groups shoot up, while billions have been poured into credit unions.
Such a raft may be too ambitious for the Government but, at its request, the Office of Fair Trading is now reviewing the high-cost credit market. It is expected to report at the end of the year. The Government is also consulting on its White Paper, “A Better Deal for Consumers”, published last month. Organisa-tions like Zacchaeus Trust, Debt on Our Doorstep and Church Action on Poverty see these and the disillusion with soft-touch regulation as giving them a second wind to secure government backing to tackle the predations of the doorstep selling industry.