9.7 million households across the UK reported a fall in income by the end of July 2020 as a direct consequence of the pandemic. Nearly one in six households – 16% – were struggling to make ends meet and 10% were in serious financial difficulty[1]. Those in the poorest households saw the biggest hit to their earnings[2] leaving them struggling to keep up with household bill payments, and food bank usage increased substantially. The Trussell Trust expects to be giving out six emergency food parcels every minute this winter[3].
Covid-19 has had a substantial impact on household finances, but finances were already faltering before the pandemic. Throughout 2019 unemployment, under-employment and zero hours contracts increased and wages fell in real terms[4]. The impact of the pandemic on top of this has been significant; 12 million UK adults now have low financial resilience[5].
Pay-day loan firms are capitalising on this mass desperation. The Times recently reported that firms are saddling vulnerable families who have lost jobs with loans at interest rates up to 1700%[6]. This will hamper the UK’s recovery by harming people’s financial wellbeing and mental health, affecting their ability to get back into work.
But credit is not an automatic route to problem debt despite a negative perception of loans for low income people. Affordable credit can be an important buffer for families to improve their financial stability and a gateway to other support. It has a number of uses including covering unexpected expenses or expected larger payments by spreading them out over time, such as the purchase of a new washing machine.
When credit doesn’t work well people can lose control of their finances, with a detrimental impact on their health, relationships and wellbeing. It is crucial that people aren’t getting trapped in debt with high-cost lenders now because it can trap families in a cycle of hardship that will last far beyond the Covid-19 pandemic.
A better solution exists. There is a fair alternative available to families in need of credit, but awareness is low. Community Development Finance Institutions (CDFIs) can play a key role in mitigating the financial hardship experienced by households during this period by offering access to affordable credit when people need it, and supporting them with advice to improve their financial stability. The cost of borrowing from CDFIs is significantly lower and they save their customers hundreds of pounds per loan compared to high cost alternatives. As non-profit lenders their mission is always aligned with their customers’ wellbeing.
To build financial wellbeing we should champion CDFIs, so more people know that if they need credit there are better options than exploitative lenders: a fantastic sector working to make households’ finances better, not worse.
[1] Kempson et al. (2020). Emerging from Lockdown: Key Findings from the 3rd Coronavirus Financial Tracker Survey. Standard Life Foundation. Available at: https://research-information.bris.ac.uk/en/publications/emerging-from-lockdown-key-findings-from-the-3rd-coronavirus-fina
[2] Bourquin et al. (2020). The Effects of Coronavirus on Household Finances and Financial Distress. Institute for Fiscal Studies. Available at: https://www.ifs.org.uk/publications/14908
[3] Weal, R. (2020). ‘The PM says no child will go hungry – our new report shows extending local welfare would be a good place to start’. The Trussell Trust. Available at: https://www.trusselltrust.org/2020/10/29/the-pm-says-no-child-will-go-hungry-our-new-report-shows-extending-local-welfare-would-be-a-good-place-to-start/
[4] K. Rowlingson, S. McKay (2020). Financial Inclusion: Annual Monitoring Report 2020. University of Birmingham: https://www.birmingham.ac.uk/research/chasm/research/projects/monitoring-financial-inclusion-uk.aspx
[5] Financial Conduct Authority (2020). Vulnerability and Harms Survey. Available at: https://www.fca.org.uk/news/press-releases/fca-highlights-continued-support-consumers-struggling-payments
[6] Ellery, B. (2020). ‘New Breed of Pay-Day Loan Firms Cash in on Pandemic’. The Times. Available at: https://www.thetimes.co.uk/article/new-breed-of-pay-day-loan-firms-cash-in-on-pandemic-zg9939zp2