More UK households are turning to high-cost lenders, says charity

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Struggling UK households are turning to high-cost lenders in growing numbers as the cost of living crisis leaves them unable to pay their bills, anti-poverty charities have warned.

It comes as the subprime lender Amigo, which has agreed to pay compensation to customers sold unaffordable loans, revealed plans to launch using a new brand called RewardRate. It wants to offer a personal loan with an annual interest rate of 49.9% and a guarantor loan at 39.9%.

The high-cost credit industry, which includes doorstep, guarantor and payday loans, lends to people with poor credit scores who might not be approved by traditional lenders.

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The loans have high annual percentage rates, meaning people end up paying back much more than they borrowed.

Charities expect more people to become reliant on this type of debt, with high-cost borrowers already more likely to be in arrears or struggling to pay for essentials.

Rachelle Earwaker, a senior economist at the anti-poverty charity the Joseph Rowntree Foundation, said that more than one in 10 low-income households – a figure of 1.3 million – had already taken on credit in order to pay their bills “but what we’ve also seen is that 870,000 households are planning on doing that in the coming months”.

She said: “I think that gives you an indication of what is to come. We’re now seeing some of the impact of high prices but a lot of that won’t have kicked in yet, so I think it absolutely will get worse before it gets better.”

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Amigo, which almost went bust last year, stopped lending in 2020 to deal with mis-selling complaints. The new loans require the approval of the FCA before they are made available. Borrowers can reduce the headline interest rate if they pay on time and can also freeze a payment once a year, with no penalties.

It argues that its loans should not be described as high cost, instead saying it caters to the mid-cost market. “Lots of providers have left the market over the past few years, and there remains demand, which may be increasing as a result of the cost of living challenges.

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“As reported by the Centre for Social Justice, those who can’t use legitimate lenders are turning in greater numbers to illegal lenders, which makes the role of companies such as Amigo important to its customers,” the company said.

Some FCA-regulated short-term lending companies operating online are offering loans with APRs of up to 500% and 1,200%.

Research by the Joseph Rowntree Foundation found that one-fifth of low-income households were in debt with a licensed high-cost credit lender, and 84% of those were in arrears with at least one household bill.

In total, 90% of households with high-cost credit have gone without at least one essential this year, or experienced food insecurity in the last 30 days, the data showed.

“I think no one chooses to take on lending at that level unless they absolutely have to to get by,” Earwaker said. “It’s a spiral: if you’re in a position where you have to take out that loan in the first place, there’s a really high likelihood you’re not going to be able to keep up with the repayments attached to it.”

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The debt charity StepChange said that it expected to see an increasing reliance on high-cost credit as price rises stretched people’s financial resilience.

“Taking out high-cost credit is not a discretionary activity – it’s due to a lack of other options and it is often taken out to pay for essentials,” said Sue Anderson, its head of media.

However, she added: “At a time when people are grappling with the cost of living crisis, and many low low-income households are struggling to make ends meet, further borrowing is unlikely to be the answer to many households’ financial problems.”

The FCA said it had made several reforms to the credit market since 2014, including capping the cost of payday lending and affordability requirements for new loans.

“Where people do get into financial difficulty, help is available,” a spokesperson said.

“Lenders must provide tailored support, including ensuring arrangements to make repayments are sustainable. We’ve recently reminded lenders of their responsibilities and that we’ll act if they don’t meet these.”

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