Monthly Archives: August 2020

From buying a home, to replacing an appliance, or meeting an unexpected emergency, many households rely on some form of credit. But over the past four decades the UK has seen a rapid increase in consumer debt. This is now coupled with the impact of COVID-19 – with some people losing their job and others being furloughed; and sectors such as tourism and hospitality struggling as some food retailers increased recruitment. Relying on credit for everyday expenses is a problem across the whole population and while many factors have been driving its use, more households may soon find themselves unable to access credit. What credit options are available to people who need to borrow money to cope with a crisis or life event and for whom accessing mainstream lenders is not an option? What credit options available in rural areas? Jessica Sellick investigates. 

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Borrowing money is something many of us take for granted and yet access to credit is not a level playing field. Over time many of the poorest households have been unable to borrow money through mainstream channels (e.g. a high street bank, a credit card company, mortgage broker or car loan provider). Having a low income, a lack of credit history or not taking up financial products such as having a bank account can all present barriers to mainstream borrowing. This often leads people to seek out alternatives, including payday loans or doorstep lenders. Increasing access to mainstream credit, and thus reducing the cost of credit, has the potential to save people hundreds of thousands of pounds each every year. While recognising that access to credit is a personal, emotive and difficult issue for many; what is debt, credit and access to affordable lending like in rural areas and what more needs to be done? I offer four points. 

Firstly, how much money do we owe?  In 2006 the Office for National Statistics (ONS) began a biennial longitudinal Wealth and Assets Survey. This measures the assets, savings, debt and retirement planning of households and individuals. The latest release, known as round 6, covers the period 2016 to 2018 and was published in December 2019. 

• Total household debt in Great Britain covering the period April 2016 to March 2018 was £1.28 trillion; of which £119 billion (or 9%) was financial debt and £1.16 trillion (91%) was property debt such as mortgages and equity release. 
• Total household financial debt in round 6 increased by £12 billion (or 11%), up from £107 billion in April 2014 to March 2016. Most of the change was accounted for by an increase in hire purchase debt (up by £6 billion) and student loans (up by £7 billion). 
• The least wealthy 50% of households held 36% of total household debt. Between April 2016 and March 2018, total debt was three-times larger than total wealth for the lowest wealth decile. 
• 4% of households between April 2016 and March 2018 were identified as having problem debt – with people in this cohort more likely to rent their home (66% renting compared with 34% for other households), and have an unemployed household head (6% compared to 1% overall). 

Defra publishes a Statistical Digest of Rural England. The latest version includes data from the ONS living costs and food survey. In the year ending March 2018, households in rural hamlets and isolated dwellings had some of the highest average disposable incomes and expenditure compared to urban areas: income levels were £903 in rural areas compared to £189 in urban areas; and expenditure levels were £626 in rural, £121 higher than in urban areas. Households in rural town and fringe areas had the lowest levels of both expenditure and disposable income. These figures do not include mortgage payments and nor does the Digest collate specific data on debt in rural areas. 

According to the Institute for Fiscal Studies (IFS), UK households currently hold  around £230 billion of unsecured or consumer debt (e.g. loans, credit card debt, hire purchase agreements, overdrafts); equating to some £8,000 per household. By unsecured debt we mean debt that has no collateral involved i.e., it is not anchored to a specific asset such as a home.  

High Cost Short Term Credit (HCSTC) is defined by the Financial Conduct Authority (FCA) as unsecured loans of up to 12 months with an APR of 100% or more, excluding overdrafts and home credit or bill of sale agreements. It can include payday loans, home collected credit [doorstep lending], catalogue credit, some rent to own, pawn-broking, guarantor and logbook loans. 

Back in February 2015 the Competition and Markets Authority (CMA) carried out an investigation into the payday lending market – identifying a clear demand for short-term, small-sum credit. 

• Whilst the single most common amount borrowed was £100, the average loan size was found to be £260. 75% of customers had taken out more than one loan in a year, with an average customer taking out 6 loans over a 12-month period.  
• People who were aged between 25-30 years old, who were unmarried, living in rented accommodation and on an income of less than £1,500 per month were most likely to take out a payday loan. 
• 83% of payday loan customers took out their loan online, with 29% taking out a loan on the high street, and 12% using both channels. 
• 53% had taken out a payday loan to cover living expenses such as grocery and utility bills; 10% for car or vehicle expenses; 7% for general shopping; and 2% to pay off another loan. 
• 52% took out a payday loan because they had suffered an unexpected increase in expenses or outgoings; with 19% indicating they needed a loan in response to a decrease in income. 
• 59% said the loan was for something that they could not have gone without.  

In July 2015 the Consumer Finance Association (CFA) published a commentary on borrowing and spending in the 21^st century. While the report acknowledges how the HCSTC industry has been subject to increased regulatory scrutiny, the industry has evolved to respond – with many lenders now offering loans over a period of months rather than days (a timescale not covered by all mainstream providers). 

In 2014 the FCA took over regulation of consumer credit, introducing a range of measures to tighten the short-term loan industry. This led to the introduction of a price cap being applied to the industry from January 2015. The cap applies to the initial cost of the loan, the total amount of interest payable and the default fees that can be charged. Four years after the interest rate cap was introduced, a review of the high cost short term credit (HCSTC) market in 2019 found: 

• For the year ending June 2018, 5.4 million loans had been taken out (almost 50% fewer than the peak in the market in 2013). 
• The number of providers had fallen from more than 100 in 2016 to 88 in 2018. 
• Between 2016 and 2018 customers had been borrowing more than £1.3 billion each year, and paying in excess of £2 billion. 
• People taking out payday loans tended to be younger (with 37% aged 25-34 years) and were twice as likely as the average population to report feeling less confident about managing their money (61% of payday borrowers said they were less confident in managing their money compared to a national average of 24%). 

According to the Money Advice Service (MAS), doorstep loans are often for small sums – between £50 and £500 – over short periods, with repayments collected weekly or fortnightly at your home. In 2017, Citizens Advice published a report looking at how the doorstep loan market operates. 

• Citizens Advice estimated that there were more than 420 home credit businesses in operation with 1.3 million customers. 
• While doorstep lending was found to be shrinking, it remains the largest high cost credit loan market. In 2016 Citizens Advice helped 23,600 people with doorstep loan issues (more than any other high cost credit loan type). 
• The average doorstep loan debt in the first two-quarters of 2016-2017 per client was £690. One-third of clients seeking help from Citizens Advice had been able to take out multiple doorstep loans: with 20% of clients having two doorstep loans, 6% having 3 doorstep loans, 3% having 4 doorstep loans and 3% holding 5 or more doorstep loans. Two clients had been able to take out 14 doorstep loans each. 

Definitive data on the overall size of the HCSTC market is not routinely collected. Nor is information straightforwardly available on the relationship between debt (secured/unsecured), mainstream financial providers and short term credit. We know that some people are more likely than others to experience debt and access HCSTC (e.g. younger, unmarried, income of less than £1,500 per month). How can we build upon existing data and information to better understand the distribution of debt and HCSTC (e.g. by household type, geography, confidence in money management skills) – and the relationship between mainstream providers and alternatives in the HCSTC market? If HCSTC providers are reducing, and people will need to continue to access credit, where are they getting it from, and what are the costs of them doing so?   

Secondly, who takes on multiple credit? In March 2020 the FCA commissioned PWC to understand more about repeat borrowing in the HCSTC market. Six key products were covered in their narrative report: payday loans, home collected credit, rent to own, guarantor loans, logbook loans, and high cost personal loans. PWC found that re-borrowing had become a habit formed by customers over several years and was now part of their financial lives. Re-borrowing was felt to be the customer’s only option – they needed the money and didn’t feel they could raise it any other way. Re-borrowing also led to an increase in everyday stress and worry, with over 60% of customers that participated in the qualitative research saying they regretted their decision to take on additional borrowing and 75% of customers finding themselves cutting back elsewhere to keep up with repayments.

The report also found customers had moved very quickly from their first payday loan to taking out multiple payday loans. Indeed, some were held concurrently and others people had very limited, if any, break in between payday loans. Payday loan customers were found to have the biggest borrowing portfolios – for both mainstream and high cost credit. While two thirds (65%) of payday loan customers surveyed said they had considered other options before taking out the borrowing they did, the qualitative research suggested that in practice most alternative options were quickly discounted as too embarrassing, unfeasible, and/or too slow.

Researchers found doorstep lending customers [known as home collected credit] were more likely to be female, over 55 years and have an annual income of less than £12,000. Less than one-third of customers were in employment and half were reliant on benefits. 60% of customers had been with the provider of their most recent loan for 3 years or more. Over half said they had taken their first home collected credit to buy a specific item or fund specific event; while nearly 1 in 10 said they took it because it was offered. Very few, if any, alternatives to doorstep lending were considered and fewer customers had mainstream credit relationships to call upon. 

The amount of payday and doorstep lending in rural areas – and levels of repeat borrowing- is not available. There may also be more informal sources of credit (e.g. borrowing from friends or family, having a tab to be settled at a future date), which may operate and indeed be more prevalent in rural areas but about which little is currently known. What is the relationship between mainstream financial products, the HCSTC marketplace and more informal lending?    

Thirdly, what do we know about current access to credit in rural areas? In June 2018 the FCA published a report setting out the findings of the Financial Lives Survey. While the survey overall found rural residents were more satisfied with their financial circumstances compared to their urban counterparts; the analysis did reveal differences between urban and rural areas when demographic, employment, household income and health variables were taken into account.  

• Rural areas have a higher proportion of adults aged 55 years and over (13%), or who are younger, with a physical or mental health condition lasting or expected to last 12 months or more, which experience difficulties getting to a bank. 
• The take-up of mobile banking in rural areas is nearly half that of urban areas (23% in rural areas compared to 45% in urban areas). 
• People living in rural areas are more likely to own their own home and less likely to have a credit or loan product compared to their urban counterparts.
• In terms of unsecured debt, adults in rural areas were found to owe £2,510 – a figure lower than the UK average of £3,320.
• However, people in rural areas were found to have higher vulnerability levels than those living in urban areas – with 54% of adults in rural areas showing characteristics of vulnerability. The survey defines vulnerability as having limited financial resilience, low financial capability, suffering a recent life event (such as redundancy, bereavement or divorce) or a health related problem that affects a person’s day-to-day activities a lot. 

In a speech to the Retail Banking Conference in March 2019, the Chair of the FCA, Charles Randell, highlighted how branch closures can hit rural areas particularly hard – with only 50% of consumers living within 5 miles of their nearest branch, compared to 90% of consumers in urban areas. Cash is also disproportionately used by older people and when branches close this is not always accompanied by an increase in mobile banking.  Similarly, online banking means access to a computer or phone and connectivity and for some consumers the costs of these are prohibitive. 

The Good Credit Guide, published by DEMOS in July 2019, also found rural areas tend to do much better than urban areas in terms of credit scores, partly due to the above average number of older people living in rural areas and because credit scores tend to improve as we get older. The map of credit need (see page 22) reveals how rural areas fall somewhere in the middle between affluent areas with high levels of financial service provision (e.g. London boroughs, the South East of England) and the clustering of post-industrial coastal settlements where more households seem to struggle. However, low levels of credit need do not necessarily translate into low levels of credit use i.e., wealthier households can have higher levels of unsecured consumer borrowing because they can access credit more easily, abundantly and cheaply. The Index identifies 29 ‘credit deserts’ – places with high credit needs but low credit scores. The deserts are: Torfaen, Lincoln, Barnsley, Dundee City, Rochdale, Swansea, Blackburn with Darwen, Nottingham, Hyndburn, South Tyneside, Burnley, Corby, Doncaster, Sandwell, Stoke-on-Trent, Halton, Sunderland, Caerphilly, Liverpool, Wolverhampton, Hartlepool, Neath Port Talbot, Rhondda Cynon Taf, North East Lincolnshire, Knowsley, Blackpool, Merthyr Tydfil, Blaenau Gwent, and Kingston upon Hull. Interestingly, these areas also have five times as many payday lenders, pawnbrokers and rent-to-own shops as the areas with the lowest need.

In a speech to a roundtable of bank chairs in June 2020, the Chair of the FCA described how COVID-19 has accelerated the move away from cash to other forms of payment, and reduced access to bank branches in highlighting the financial exclusion of rural communities, older people and other communities of need. He further suggested that in response to COVID-19 we need to reassess our approach to consumer debt, retail investments and financial exclusion.

While this information suggests, overall, that rural households are more satisfied with their financial circumstances than their urban counterparts, rural dwellers may be more financially vulnerable. What happens if/when mainstream providers and lenders leave rural areas (e.g. the last bank branch or post office closing in a village or town) – do people find it more difficult to access lending facilities? While some alternative ways to bank are in the mainstream (e.g. using an alternative/more distant branch, an ATM, credit union, community finance provider etc.) do other alternative and non-mainstream responses also step in?  

Finally, how is credit and debt changing amid COVID-19? Falls in household incomes due to COVID-19 will be a particular challenge for households where debt repayments already absorb a significant share of household income. According to the IFS, the impact of COVID-19 on the finances of different households varies widely. Using Money Dashboard, a budgeting app, the IFS has modelled the impact of the pandemic so far on earnings, incomes and financial distress.  Compared to predictions before the crisis, and looking at data in May 2020, the IFS found the number of jobs was 4% lower and median after-tax household earnings were 9% lower (equivalent to £160 per month). Households in the poorest fifth have been hardest hit – with a fall in their median household earnings of 15% (or £160 per month). By May 2020 the number of households making mortgage, rental and council tax payments was 14%, 11% and 9% lower respectively than what would have been predicted pre-COVID. While non-payment of mortgages is spread evenly across income distribution; poorer households are falling behind by more on council tax and utility bills. Looking at those who paid a given bill in January 2020 but did not pay that bill in May 2020, the average January bill amount was £1,660 for mortgages, £650 for rent, £170 for council tax and £139 for utilities. 

A briefing note prepared by the Centre for Rural Economy (CRE) and Rural Enterprise UK in April 2020 called for Government COVID-19 support to be sensitive to rural circumstances. For example, COVID-19 may impinge on those with part-time, seasonal, low income and more irregular work in rural areas, many of whom may more easily fall through the cracks of current benefit support provision. Drawing on the findings from the Rural Lives research project, which has highlighted a number of difficulties facing benefit claimants in rural areas (e.g. the complexity of the system, distance from sources of advice and support, the need for regular digital interaction to register for and make a claim etc.); amid COVID-19 the report suggests that the benefits support system may struggle to help people in rural labour markets. For example, any delay when first claiming Universal Credit may leave some rural dwellers needing to fill a gap in their income through a payday loan, a social fund loan and/or with support from foodbanks. 

Analysis by the IFS indicates that 1 in 5 individuals are already living in a household where more than 10% of income is spent on unsecured debt repayments; 1 in 10 of these individuals are living in households that spend 20% of income on debt repayments; and 1 in 20 of these individuals lives in households that spend over 30% of their income on debt repayments. 1 in 4 middle-income households (in the 7^th income decile) spend more than 10% of their income on debt repayments; with 12% of those in the 4^th income decile spending 20% of their income on debt repayments. The analysis further reveals how some individuals may well continue to face debt repayment problems, due to additional debt being taken out to cover for falling incomes, because household incomes fail to recover, or because of accruing interest. 

This analysis suggests that ‘problem debt’ may start to affect more households, and that we need a quick economic recovery to prevent increases in accumulated debts that are unsustainable for households. This information also reveals that people in rural areas may struggle more, or fall through the cracks, of mainstream employability and benefits support provision – and more work is needed to fully understand rural vulnerability.  

Many of us will rely on credit at pivotal moments in our lives to help us through income shocks or to pay for something (e.g. house, car, studies). However credit (and access to it) can be part of an ongoing cycle of poverty and disadvantage for some. While policy makers have long been interested in developing affordable, at scale credit services to those on low incomes or facing an acute income shock, this takes on new meaning amid the impact of COVID-19 on credit scores, credit need and debt. How can we better understand the financial pressures facing people in rural areas? How can we better measure access to, and the affordability of, financial products (secured/unsecured, short term/long term, mainstream/HCSTC) in rural areas? And rather than wait until debt begins spiralling out of control, what mitigations can be put in place now to help people in rural areas cope?   

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Jessica is a researcher/project manager at Rose Regeneration and a senior research fellow at The National Centre for Rural Health and Care (NCRHC). Her current work includes supporting health commissioners and providers to measure their response to COVID-19 and with future planning; working with 8 farm support groups across England on a Defra funded resilience programme; and helping Local Authorities to measure social value. Jessica also sits on the board of a Housing Association that supports older and vulnerable people. 

She can be contacted by email jessica.sellick@roseregeneration.co.uk. 

Website: http://roseregeneration.co.uk/ https://www.ncrhc.org/ 

Blog: http://ruralwords.co.uk/ 

Twitter: @RoseRegen