Levels of household debt have soared to record highs and a new way of lending aimed at the poor is needed, according to a new released report by the Centre for Social Justice (CSJ).
The right wing think tank, founded by Iain Duncan Smith, the work and pensions secretary, warns that household debt has risen by more than £34 billion in less than three years and is £1.47 trillion – the highest ever.
Some 8.8 million people are “over-indebted.” And borrowing on credit cards, bank overdrafts, and pay day loans amounts to more than £170 billion - the highest in four years.
Fifteen million Britons are going into debt just to cover their bills, says the report - based on research commissioned by JPMorgan Chase Foundation.
It argues that those on low incomes should have financial services and products specifically aimed at their needs.
Writing in the preface, Dr Alex Burghart, policy director at the CSJ, says: “Without access to financial services that meet their needs, families are forced to take out expensive loans that they then struggle to pay off.”
He argues that while more needs to be done to create jobs and improve pay, “there is also a need for financial services that serve the needs of low-income families.”
Dr Burghart adds: “By helping to develop a new marketplace for socially responsible Alternative Financial Institutions (AFIs) we can build a new generation of financial services specifically tailored to meet the needs of low-income families.”
Expensive forms of credit and high penalty charges which can see low income households get into difficulties are “systemic issues of the current financial system,” says the report.
The alternatives which are needed include not for profit banks and lenders such as credit unions and community development financial institutions, as well as social enterprises and charitable finance organisations.
An independent body should be created to support socially responsible banks and lenders, and there should be a registry of vulnerable customers, such as those with mental health issues, so that creditors can take account of their circumstances, it says.
Responding to the findings, Julia Unwin, chief executive of the Joseph Rowntree Foundation, said: “Markets which work for all consumers are vital to give people control over their finances and help them find a way out of poverty.” But she added: “We also need action to raise productivity and increase the number of well-paid, secure jobs with good prospects if we are to reduce the number of people who need to borrow money to cover basic bills.”