Struggling British households are increasingly turning to high-cost lenders as the cost of living crisis prevents them from paying their bills, anti-poverty charities have warned.
It comes as subprime lender Amigo, which agreed to pay compensation to customers sold unaffordable loans, revealed plans to launch using a new brand called RewardRate. She 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 home loans, guarantors, and payday loans, lends to people with poor credit ratings who might not be approved by traditional lenders.
The loans have high annual percentage rates, which means people end up paying back a lot more than they borrowed.
Charities expect more people to become dependent on this type of debt, with high-cost borrowers already more likely to be in arrears or struggling to pay essentials.
Rachelle Earwaker, senior economist at the anti-poverty charity Joseph Rowntree Foundation, said more than one in 10 low-income households – a figure of 1.3 million – had ever taken out credit in order to pay their bills” but what we’ve also seen is that 870,000 households are planning to do so in the coming months”.
She said: “I think that gives you an indication of what’s to come. We are now seeing some of the impact of high prices, but much of that has yet to be felt, so I think the situation is absolutely going to get worse before it gets better.
Amigo, which nearly went bankrupt last year, stopped lending in 2020 to deal with mis-selling complaints. New loans require FCA approval before being made available. Borrowers can reduce the overall interest rate if they pay on time and can also freeze a payment once a year without penalty.
He argues that his loans should not be described as high cost, but rather that they cater to the mid-cost market. “Many vendors have exited the market in recent years, and there remains demand, which may increase due to cost of living challenges.
“As the Center for Social Justice reports, those unable to access legitimate lenders are turning to illegal lenders in greater numbers, making the role of companies like Amigo important to its customers,” the company said.
Some FCA-regulated short-term loan companies operating online offer loans with APRs of up to 500% and 1,200%.
A study by the Joseph Rowntree Foundation found that one-fifth of low-income households were indebted to an approved high-cost lender, and 84% of them were in arrears with at least one household bill.
A total of 90% of households with high-cost credit went without at least one essential item this year, or experienced food insecurity in the past 30 days, the data shows.
“I don’t think anyone chooses to loan out at this level unless they absolutely have to get out of it,” Earwaker said. “It’s a spiral: if you’re in a position where you have to take out that loan in the first place, chances are you won’t be able to meet the repayments attached to it.”
Debt charity StepChange said it expected to see a growing reliance on high-cost credit as rising prices stretched people’s financial resilience.
“Taking out high-cost credit is not a discretionary activity – it’s due to the lack of other options and is often taken out to pay for essentials,” said Sue Anderson, its media manager.
However, she added: “At a time when people are grappling with the cost of living crisis and many low-income households are struggling to make ends meet, further borrowing is unlikely to be forthcoming. the answer to the financial problems of many households”.
The FCA said it had made several reforms to the credit market since 2014, including capping the cost of payday loans and accessibility requirements for new loans.
“Where people are struggling financially, help is available,” a spokesperson said.
“Lenders need to provide tailored support, including ensuring repayment terms are sustainable. We recently reminded lenders of their responsibilities and that we will act if they fail to meet them.