Troubled UK households are turning to expensive lenders in growing numbers as the cost of living crisis leaves them unable to pay their bills, anti-poverty charities have warned.
It comes as subprime lender Amigo, which has agreed to pay compensation to customers who sold unaffordable loans, announced plans to launch a new brand called RewardRate. It wants to offer a personal loan with an annual interest rate of 49.9% and a guarantee loan at 39.9%.
The costly lending industry, which includes doorstep, surety and payday loans, lends to people with bad credit who may not be approved by traditional lenders.
The loans have a high APR, which means people end up paying back much more than they borrowed.
Charities predict that more people will depend on this type of debt as high-priced borrowers are already more likely to default or struggle to pay basic necessities.
Rachelle Earwaker, senior economist at the Joseph Rowntree Foundation, an anti-poverty charity, said more than one in 10 low-income households – a figure of 1.3 million – have already borrowed 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 a lot of that will not be felt yet, so I think it’s absolutely going to get worse before it gets better.”
Amigo, which nearly went bankrupt last year, halted lending in 2020 to deal with complaints of abusive sales. The new loans are subject to FCA approval before they can be made available. Borrowers can lower the prime interest rate if they pay on time, and can also freeze a payment once a year with no penalties.
It argues that its loans shouldn’t be called high-cost, but that it’s aimed at the mid-cost market. “In recent years, many suppliers have exited the market and there remains demand that could increase due to cost of living challenges.
“As reported by the Center for Social Justice, those who cannot use legitimate lenders are turning to illicit 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 that operate online offer loans with APRs of up to 500% and 1,200%.
Research by the Joseph Rowntree Foundation found that one in five low-income households owed money to an approved high-expense lender, and 84% of them were in arrears on at least one household bill.
Overall, 90% of households on bad credit have gone without at least one staple food this year or experienced food insecurity in the past 30 days, the data shows.
“I don’t think anyone chooses to borrow at that level unless they absolutely have to get through it,” Earwaker said. “It’s a spiral: if you’re in a position where you have to take out that loan at all, there’s a very good chance you won’t be able to keep up with the repayments involved.”
Debt relief organization StepChange said it expects reliance on expensive credit to increase as price hikes strain people’s financial resilience.
“Borrowing an expensive loan isn’t a voluntary activity — it’s because of a lack of other options, and it’s often taken out to pay for bare necessities,” said Sue Anderson, director of media.
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 the answer to the financial woes 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 increasing affordability requirements for new loans.
“Where people get into financial difficulties, there is help,” said a spokesman.
“Lenders need to provide tailored support, including ensuring sustainable repayment arrangements. We recently reminded lenders of their obligations and that we will act if they fail to meet them.”