Loan sharks will keep circling victims unless the lending industry embraces change
As many as 1.08 million people could be borrowing from an illegal money lender – a loan shark – according to a recent Centre for Social Justice report. Loan sharks take many forms, from community-based lenders operating in estates to fully-fledged organised crime groups seeking out the most vulnerable. They use pester power, intimidation and violence to exploit their victims.
These insidious tentacles of illegal lending are reaching into homes across the country with devastating impacts. The CSJ report found that its consequences can spark severe stress, anxiety, family breakdowns and criminal activity.
It’s important to understand that this is not all about back-street deals and threatening thugs, nor does it all stem from addiction and vice. Illegal lending can often be triggered by something as innocuous as a faulty dishwasher leading to an informal loan at the school gates to cover the unexpected bill. However, these scenarios can quickly spiral out of control and people who cannot access legal borrowing find themselves drawn into the world of loan sharks.
The lending industry can do good, improving people’s lives by helping customers get through unexpected or stressful situations like an unforeseen, unbudgeted expense or even losing a job or loved one. But four in five victims of hidden debt that have applied for legal credit have been rejected. They were turned away by the system and had nowhere else to go, pushing them towards illegal lenders. The lending world must do better.
Borrowing is likely to be the first port of call for people without savings or investments who face a sudden expense like a bigger than expected bill – particularly relevant in today’s environment of surging energy prices – or a broken-down car.
The lending industry needs a diverse range of lenders and products but those most in need of suitable, affordable borrowing products have seen the ladder pulled up above them.
This vacuum in the market was partly an unintended consequence of a regulatory crackdown on “pay-day lenders” who gave consumers access to short-term, immediate bridging credit – albeit at higher rates.
As a result, “high-risk” borrowers in need of short-term cash to help them through a difficult situation can now struggle to successfully apply for borrowing products from trusted, regulated sources.
I am not advocating for a reckless extension of credit to every customer in every situation. Clearly though, more can be done to support those needing “stop-gap” finance to get through sticky situations. The industry must provide a wider range of regulated products so that borrowers don’t have to turn to illegal sources of debt.
The CSJ report has started the conversation. Lending businesses must now take this forward. We have been part of the problem, so we need to help find the solutions.
From a regulatory viewpoint, the FCA has indicated that change is required in this space, as we see rising pressure on consumers and more borrowers are getting into difficulty. We also support the CSJ’s call for reform of the Credit Union sector. Our research last week found that a record 1.92 million people are now members of a Credit Union in the UK with all-time high borrowing volumes of £1.74bn. But we can further harness their potential and help them become fit for the digital world by connecting them to online platforms.
The lending industry must be challenged to provide the widest range of products to the widest range of customers possible. Industry leaders must take a hard look in the mirror and ask themselves whether they are prioritising this fairly in line with the resources at their disposal.
Our combined efforts will make the difference in the fight against illegal lending and the essential pursuit of fair access to credit for all.
We have the power to change lives and with many people fearing the rising cost-of-living, we must stand up to protect those who need this support.