The cost of living crisis is forcing changes in the way we manage our finances. This is not just about households tightening their belts – although fewer than one in five of us expect our spending habits to remain the same as the crisis ramps up. Many are also now turning to credit providers to help their families through the turbulence.
A poll of 4,000 adults by Opinium suggests that a quarter of us – around 13 million people – expect to borrow cash in direct response to the new pressures on the cost of living. For the majority, this will likely take the form of dipping into overdrafts or using credit cards. For some it will mean falling into arrears on essential bills.
But there are others who will slip even further through the cracks, exposing themselves to the dangers of unauthorised and illegal money lenders – known colloquially as loan sharks. A new report from the Centre for Social Justice estimates that up to a million people could already be borrowing from an illegal money lender in England today. We must be alive to this ugly and growing problem.
While some households will be able to weather feasible, if uncomfortable, changes to their spending habits, ignoring an emergency spending demand (such as a broken-down car or washing machine) simply isn’t an option. And with levels of financial resilience perilously low – over 11.5 million Brits have less than £100 in savings according to the Money and Pensions Service – access to credit can be the difference between keeping just above water or drowning financially.
Of course, loan sharks are all too well aware of this. Illegal lenders will be grinning at the combination of an increasingly diminished regulated credit market and the growing pressures on household budgets.
And so it is imperative we provide an alternative. CSJ analysis found that four in five confirmed victims of illegal lending had been turned away when they tried to borrow from a legitimate source of credit. Accessible and affordable finance is today available from local credit unions, who households denied from mainstream lenders can use to access finance, as well as to build savings. Yet the credit union sector remains a scandalously untapped resource in our fight against the cost of living crisis.
To harness their potential we should drive a credit union revolution. Already, credit unions support 1.9 million members across the UK and steer assets totalling £4bn, which they use to finance services to members. But they could be doing so much more. Further growth – fuelled by strategic mergers – would enable the sector to subsidise more affordable lending. Yet to achieve this, credit unions must be freed from a straitjacket of red tape – much of it over 40 years old.
Written in 1979, the Credit Union Act doesn’t work as well as it should in today’s fast-evolving social, digital and financial landscape. We need to rewrite the Act to remove rules blocking the creation of bigger, bolder credit unions that can offer a variety of services and take on more members. By rolling their frontiers forward – but retaining their strong community ethos – credit unions will be able to maximise their potential to fulfil a market-driven advance in financial inclusion.
But alongside financial inclusion must come financial resilience. The Chancellor has announced several fiscal measures to cushion the impact of the spike in prices. But it remains that in every cost of living crisis we are reminded of the importance of savings, which provide families with a first line of defence against financial shocks. Alongside deploying further fiscal firepower later in the year to support low-earners, the Government should do more to encourage and incentivise those building up savings. The Help to Save scheme should be further promoted to contend with its low uptake, and the generosity of the scheme should be reviewed to see if more could be done to encourage people to build their rainy day funds.
We know that loan sharks are circling and now is the time to act. We need a bold vision for the future to unleash the power of credit unions to advance financial inclusion and cushion against the sharpest edges of the cost of living crisis. Otherwise, more of us could find ourselves swimming with sharks.
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