The cost of borrowing

Poverty Credit cards
ViewsMay 13th, 2014

I will start by stating something that sounds a bit strange: it is very expensive to be poor.

This is not a new phenomena, Jesus threw the moneylenders out of the temple because they were taking advantage of the poor. We even have the old word ‘usury’ for the practice of making unethical or immoral monetary loans intended to unfairly enrich the lender. We also have a more modern word in ‘loan shark’.

Many people take out a loan until pay day; in fact many people I know take out a loan until pay day by using a credit card. It is paid back when the bill becomes due on or after pay day and the cost of borrowing is zero. For those who have money and a good credit rating, the cost is zero; for those who do not have money the cost can be excessive.

Let us look at the cost of borrowing £500.

‘Not a very large sum of money’ most people reading this would think. However, for many of my constituents, it is the sort of loan that they look to take out to pay for Christmas or, in some cases for a funeral which can be incredibly expensive and often comes at a time when it is not expected.

Pay-day lenders lend amounts that have to be repaid within 30 days. For a loan of £500, you would have to pay £278 in interest for a 30 day loan, an interest rate of 56%. A loan from a finance company can cost you £118, a rate of 24% to be paid back over 12 months and an unarranged overdraft can cost £95 for one month giving an interest rate of 19%. However a credit union, which I believe is the best place to borrow and I wish that more people got involved in them, costs £36 for up to 12 months at an annual rate of 7%. Overdrafts can cost £8 for one month, but a credit card at 0% costs you nothing.

So people with large and regular incomes and a good credit history can borrow using their credit card and this means that they can borrow several thousand pounds at 0% interest and when the 0% interest rate runs out on one card they can then transfer the loan to a new one also at 0%.

High-cost credit companies would have been rubbing their hands at the prospect of Christmas last year.

After another year when prices rose faster than wages and the Government’s cuts caused further misery to the poorer communities across Britain, people looking for a way to treat their families over the festive period would have been looking for quick, easy money.

Sadly, if the large scale and continuous advertising is anything to go by, they probably had a bumper Christmas. But in Swansea, Movement for Change activists running Swansea Bay Fair Credit made a small dent in their plans.

After negotiations with Swansea Evening Post and The Wave, SBFC ensured that in the run-up to Christmas, there would be free advertising for LASA, the local credit union for the Swansea area, and this plan worked.

“It was incessant,” said Denis Greenall at LASA, “as soon as the ad went out we were just inundated with calls.”

The impact that SBFC had on fair credit was immediately apparent as soon as the campaign started.

The rate of growth in savings increased dramatically once the campaign began in September, and the number of approved short term loans grew alongside that.

In the 3 months prior to the campaign beginning, LASA approved 50 loan applications. That grew considerably once the campaign began. But in December, that spiked to over 100 in a single month. Those loans were for £50,000, saving over £35,000 for LASA members compared to the interest charged by pay day lenders, at the high interest rate indicated above. This is a huge increase in the spread of savings and fair credit and is in a large part, due to the work of SBFC.

Unfortunately the number of people using the local credit union would have been vastly outnumbered by those seduced by TV advertising, taking out pay day loans from one of the many high cost lenders advertising extensively on day time TV.

The challenge facing us is to get more people to use their local credit union and less to use high cost lenders. This of course will not solve the problem for everyone who needs credit. There is a need for small and relatively low cost loans to be made available by mainstream lenders.

Mike Hedges is Assembly Member for Swansea East.

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