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 StateUKIrelandSpainNetherlandsBelgiumPortugalFranceFinlandGermanySwedenDenmarkNorwayItalyGreeceAustria

Highly developed

Somewhat developed

Undeveloped

Source: OFT (2009)

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

Form of Finance Quick to get Easy to access Easy to understand

Cheap Trust myself/gives me control

Want to help me

Payday loan Credit card Overdraft Personal loan Credit Union loan Store cards Car manufacturer finance

Pawnbrokers Loan from friends or family

Key:

Strongly Agree Strongly disagree

Payday loan users attitudes and views on financial products

UK context

Credit provider Repayment period

APR Amount repaid

Typical Credit Union (at least 8 weeks saving required beforehand)

52 weeks 12.7% £318.64

Credit Unions (offering instant loans)26.6% APR, paid over 52 weeks

52 weeks 26.6% £337.99

Community Development Financial Institution (offering instant loans)

50 weeks 47.5% £357.50

Typical home credit company (home collection, APR 272.2%)

52 weeks 272.2% £546

Difference between the cheapest and most expensive

£227.36

Cost comparison of a £300 loan

Cost of borrowing

(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 t 020 7799 7900Fleetbank House, f 020 7799 7901Salisbury Square contact@consumerfocus.org.uk London www.consumerfocus.orgEC4Y 8JX