When the banks can't help, or won't, the money lenders will, and do so happily. Some kind of help
f sharks go crazy at the scent of blood, the loan sharks of Britain must be close to a frenzy. Last week two lead- ing economic think-tanks dropped bait in the water by declaring that the nation was in recession. Then the Social Security Secretary, Alistair Darling, lamented that in the final year of the 20th century "a child can still be born poor, live poor, die poor". The Government would carry out an annual poverty audit, he announced, to find out who was suffering the most.

Perhaps he should just ask the money lenders, who swim in human misery to survive. The evidence suggests that they are thriving more than ever, by offering loans at exorbitant rates to the poorest and most vulnerable members of society. As recession bites, more of us will become poor - and the poor will get poorer.

If you're in serious financial trouble you don't have to take your chances with Big John in the back room of the Dog & Duck any more. The money lender of today does not have to break the law (or your legs) to make a killing. He's more likely to use intimidation and the legal system to make sure you pay him back.

Anyone with a credit licence can lend money at interest rates of up to 1,000 per cent, quite legally. As the economy has slowed over the last few years the number of licences issued has increased, from 15,500 in 1995 to nearly 18,000 last year.

Tabloid newspapers such as the Sun are stuffed with advertisements by brokers offering to gather up all your debts into one easy loan. They attract the customers that no one else will touch - either because the person's credit rating is bad, they owe lots of money already or they have been the subject of court orders.

"We don't want to know your life history," says one ad offering loans of up to pounds 250,000. "We don't need to contact your boss. You don't even have to have a boss."

All you have to do is dial a freephone number to get help straight away. The promises of fast payment and relatively moderate interest rates are tempting, but the small print often differs from the main ad. Many begin with modest loans that turn into huge amounts. The ads attract people such as Hilary, who borrowed pounds 13,000 and ended up with a demand for pounds 67,000. Her story is told below.

"They may not be illegal but some of them are extortionate," says Moira Haynes, of the National Association of Citizens' Advice Bureaux. "Of course, the greater the risk to the lender, the more they're entitled to charge."

For all their flashy promises, the brokers who advertise in the newspapers will not help everyone - only those who have a home that can be used as security against a loan. The freephone number is not available to council or private tenants, who usually have to pay for a lengthy call to an ordinary line.

The Independent on Sunday rang several companies asking on behalf of someone for a loan of pounds 5,000 to repay a family debt. They were all interested and helpful until we admitted they were a tenant without a bank account. "I'm sorry, love," said one woman, "we just can't help people like that."

She must repeat that phrase often, because 10 per cent of all British households do not hold a current account, according to the Office of Fair Trading (OFT). Almost a quarter of people who applied for a current account last year were refused after failing credit ratings. Many banks have withdrawn their branches from inner-city areas.

Last month the director-general of the OFT, John Bridgeman, said those in poverty were being driven into the arms of loan sharks, and he called for basic, low-cost bank accounts, saving schemes and home insurance to be introduced to meet their needs. Life in our increasingly cashless society is difficult and expensive without an account - you can't take advantage of direct debit schemes, make a purchase by telephone, or cash a cheque without a charge, for example. Saving is almost impossible.

Vulnerable consumers - among which the OFT numbers the elderly, the disabled, the unemployed and those with a low level of education - are less likely to have home insurance but find it more difficult to replace anything lost to flood, fire or theft.

So where do they go? No further than the front door in some neighbourhoods, because the local credit broker comes knocking in person, collecting payments and offering loans. It costs only pounds 80 to get a credit licence and set up as a sole trader. "There is certainly an increase in these sorts of money lenders," says Liz Willoughby of the Merton Money Advice Centre in south-west London. She showed me a contract issued by one small company in Wimbledon for a loan of pounds 300, to be repaid over 17 weeks. When the interest was calculated as an annual rate, as the regulations said it must be, it came to 923.4 per cent.

"We would challenge it. The problem is that the people who take these small cash loans are the most reluctant to take any kind of action," says Ms Willoughby. "People feel powerless, and embarrassed at being in such a situation. They feel foolish for having taken on this kind of agreement and just don't want to think about it any longer.

"You might say that if they signed it they must pay it, but there is usually some other added vulnerability: they are not fit enough to work, or there are mental health problems."

The smaller the debt, the more aggressive the collection strategies, which depend on intimidation. Most stop short of violence, but debtors are threatened with the bailiffs, or even sent letters that look exactly as if they have come from a court.

Bob Holman, who gave up a full-time academic career to live and work on the Easterhouse estate in Glasgow, has noticed a number of new shops offering quick and easy credit that turns out to be very expensive. "If your cooker has blown up, you're desperate. You might go to the Salvation Army second-hand store and get a cooker but there is no guarantee that it will be safe or will last - and it will still cost you pounds 30. If you can just go into a shop and get a new one on credit that day, for nothing, you do it."

One such shop on the estate advertises beds, furniture and domestic appliances for sale at 29 per cent interest, with no deposit or credit checks required. However, service cover is compulsory, and pushes the interest rate up to a massive 55 per cent a year.

It used to be possible to get a grant from the government-backed Social Fund to pay for essential domestic items, says Professor Holman. Now you can only get a loan. "Sometimes the local social security office runs out of money, or it refuses to lend to people it doesn't believe will be able to pay back the loan - which means that the ones in the most trouble are excluded from getting help."

Credit unions like the one he has helped to set up in Easterhouse offer a safe place to save and borrow small amounts, but will not lend money to pay off existing loans.

Finally, if all else fails, there is always the old-fashioned loan shark. "It's hard to resist if you're very poor and a loan shark says to you just before Christmas, 'Look love, wouldn't you like a hundred quid to buy presents for the kids?' Then, after Christmas you find yourself paying back double. If you're prompt. They charge 50 per cent interest a week - and if they don't get it then you get your windows smashed. Then they get a heavy to come up and give you a bit of a shaking.

"I know a lone mum who borrowed a little bit for Christmas and she couldn't pay it back. All her windows were done in. Her answer was to run away. She borrowed a little bit more, enough to buy coach tickets, and she took the kids south to a town she didn't know, where no one knew her. They went straight into the homeless unit there. It's what that does to the children that saddens me most."

Hilary was too ill to work. None of the banks would lend her money, even though she needed it to escape from a violent partner.

Desperate for help, she rang up a finance company that advertises in the back of her tabloid newspaper, and a broker came to call. He persuaded her to cash in on the value of the home which had been left to her by taking out a loan for pounds 13,000, to be repaid over 15 years. The rate of interest was 32 per cent a year - which meant she would end up paying pounds 57,621.

It was steep, but she wanted that money badly. But things got worse for Hilary, not better. The value of her house fell. She went through a series of personal crises and fell way behind with the loan payments. Struggling to survive on benefit, she ran up debts with credit card companies and shopping catalogues.

By the time Hilary asked for help at the local Citizens' Advice Bureau seven years later her finances were in an even greater mess. Her creditors had lost patience and were attempting to repossess her house through the courts. The broker was saying it would now cost pounds 67,000 to pay off the pounds 13,000 loan. The penalties and administrative charges on that one account added up to pounds 12,500.

There is no happy ending to the story. "The debt is still outstanding and still piling up," says Liz Willoughby of Merton Money Advice Centre, who helped her defend the court action. "We had the upper hand, because the property simply wasn't worth the amount owed any more, so the lenders did not follow through with the action."

So what will happen to Hilary? "In the end the house will be sold, or she will die, in the normal course of events. Her only solution would be to give up the house and petition for bankruptcy. That's a big step to take, to lose the roof over your head."