Poor people ‘paying more for loans’
People on low incomes are paying more than rich people for credit and need better support in making financial decisions, a new report has warned.
MPs on the Treasury select committee warned that promoting financial inclusion was “crucial to the fight against poverty” and urged ministers to take action.
The report says too many people turn to illegal money lenders because they cannot access other forms of credit, and millions have no savings to fall back on.
It calls for a clampdown on loan sharks and for more competition in the home credit market, in which the Competition Commission estimates people are overcharged by £100 million a year.
The committee also says the government must do more to promote the use of so-called third sector money lenders, such as credit unions. Although a £36 million growth fund is available, the MPs say better long-term financial and technical support is needed.
Another area of concern is the lack of financial advice available to people on low incomes – the committee heard that about eight million people earning between £10,000 and £22,000 a year find it difficult to get proper advice.
One problem is that much of the advice available only comes as part of the sales pitch for a particular financial product.
The MPs say that with the introduction of a national savings scheme under the pensions reform bill, this issue will become even more important.
In addition, the report calls for action to make the government’s social fund, which acts as a money lender, more effective. In particular, it says it must change the criteria to make more people eligible for its loans.
“An effective government strategy to combat financial exclusion has a crucial role to play in enabling those on low incomes and others who are finally excluded to take their own steps away from poverty,” the report concludes.
Today’s report comes as a government inquiry is underway into the Farepak Christmas savings scheme which collapsed earlier this month, leaving 150,000 customers – many of whom are on low incomes – out of pocket to a combined total of £35 million.
David Sinclair, senior policy of manager at Help the Aged welcomed today’s report, saying that people on low incomes were facing a “bewildering future when it comes to accessing financial products”.
“Banks and other financial services companies should be strongly urged to offer basic banking products to all customers regardless of income,” he argued.
“This needs to be backed up by government investment in money management education for those millions of people struggling to make headway in a difficult landscape of dwindling services.”
Anne Kiem, head of external affairs at financial education charity IFS School of Finance, said the industry must take more action to tackle exclusion but warned individual customers must be properly informed.
“If consumers have sufficient financial education then unaffordable debt can be more easily avoided and individuals would be far more likely to make self-provision in terms of savings,” she said.
