With fairy lights up in shopping centres and crackers on offer in supermarkets, Britain is already gearing up for Christmas. In this tough economic climate, many retailers are hoping the festive season will be a chance for the public to forget their financial difficulties. And, for some companies, the millions of Britons now struggling to make ends meet are an early Christmas present.
As banks stop lending and inflation eats away at the pay packets of those lucky enough to still be in work, the past year has seen an explosion in high-cost credit lending in the UK. Payday loan companies and hire purchase stores now dominate town centres around Britain, offering astronomical interest rates on loans to those who have few other options to cover their outgoings. Last year, the payday loan sector was worth £1.7bn, a fivefold increase in the past few years. The pace of expansion is accelerating, too. Between April and May this year alone, there was a 58 per cent rise in numbers of people applying for a payday loan via moneysupermarket.com.
But this industry benefits from a lack of legislation which means that companies can charge whatever they like for credit, leading to eye-popping APRs of 4,500 per cent or more, and record profits. Wonga.com, the best-known online payday lender, quadrupled its turnover to £73.8m last year, generating £15m for its shareholders. Meanwhile, Dollar Financial, a US-based lender that owns The Money Shop, has expanded from just one store here in 1992 to more than 400 outlets across the UK. Next year, it plans to quadruple the number of stores it operates on Britain's high streets. Its chief executive recently told investors that the company's big push into recession-hit UK market had only just begun and that its target was to reach a "full country build-out" of 1,200 stores.
Across Europe and North America, governments have responded to the growth of the high-cost credit industry with restrictions on what may be charged for credit and measures to prevent the repeated "rolling over" of loans, a practice which causes serious financial detriment for consumers. These countries have lower levels of illegal lending, too, dispelling the myth that capping credit costs pushes consumers into the hands of loan sharks.
Here, our Government takes a different approach, andis seemingly impervious to the evidence of the problems being faced by millions of consumers. Citizens Advice reports a fourfold increase since 2009 in the numbers of people coming to them with debt problems after taking out payday loans. These are not people borrowing for luxuries: the Debt Advice Foundation details how one in four people who take out a payday loan need the money to buy food or essentials for their household, with 44 per cent using them to pay off other debts.
Paying for Christmas this year will be a tough proposition for millions of households across the country. New research from the Consumer Credit Counselling Service has identified 6.2 million households as financially vulnerable, and the Resolution Foundation claims that the average household will be as much as 7.5 per cent worse off next year than it is this year. Any increase in interest rates or further rises in inflation could see even more families tipped into destitution and forced to turn to these firms. While some customers are able to use these loans to manage their finances, many more find that what is supposed to be a short-term fix quickly becomes a long-term debt.
Regulating the costs of credit would make a real difference to squeezed household budgets. That's why for more than a year now I have been proposing legislation to introduce a range of caps on the charges these firms can levy. Based on what we know works in Europe and America, this would prevent the worst legal loan sharks from exploiting vulnerable people's desperation for cash, and allow the more responsible lenders to operate in a legitimate environment. The proposal has the support of a broad coalition of debt experts, consumer groups and MPs. Furthermore, a recent survey showed that 73 per cent of the public support caps on the cost of credit.
In response to this growing tide of pressure, the Government proposed commissioning research into the issue. It will take at least a year to report back, leaving vulnerable consumers in the lurch as Christmas approaches and with no guarantee of action as a result. An e-petition has been tabled calling on the Government to act now to end socalled legal loan sharking. Signing it will help send a clear message that the British public wants the same protection enjoyed by others across the world. With ministers refusing to meet me to discuss the matter, only the public can hold them to account for the consequences of this delay to families this winter.
Stella Creasy is Labour MP for WalthamstowReuse content