Fair Finance

In this blog, we hear from Daniel Pearmain, the Trust’s Policy and Research Manager on how the community finance sector is seeking to bridge gaps in provision and work with some of those experiencing the highest levels of disadvantage, providing access to fairer finance and debt management advice to improve the control people have over their lives.

Even before the pandemic began, people in the UK were already carrying some of the highest levels of personal debt in Europe. A survey of 2,000 people between 16-64 in January 2020 revealed that 63% were going into the year with personal debt from credit cards, personal and payday loans and overdrafts, of up to £100,000

In August 2020, the average personal debt had reached £31,972 with a massive £1.6 billion owed across the country. This can also sometimes spiral into even more challenging consequences, with 230 people declared bankrupt every day between June and August 2020.[1] The crisis has so far impacted the earnings of the most disadvantaged households the most. Households in the poorest fifth have been hit hardest, with a fall in their median earnings of around 15% (or around £160 per month).[2]

We know that all of this takes a toll on our mental health. The burden of debt and the anxiety this creates can act as a chronic pressure on our lives and spiral into effecting family relationships, broader social connections and our ability to feel in control of life, which we know is such an important determinant of our health and wellbeing.

Across England more than 1.5 million people are experiencing both problem debt and mental health problems.[3] It’s not surprising that there is such a close relationship between mental health and debt given the anxiety that debt can cause us alongside the very real experience of not feeling in control when we don’t have money. People experiencing mental health problems are three and a half times more likely to be in problem debt than people without mental health problems.[4]

We also know that debt can create even bigger problems for people when mainstream banks and financial products stop providing services for them because they are considered too ‘high risk’. This can lead people to being forced into turning towards payday lenders for short-term, high interest loans. In desperation, people can sometimes find themselves turning to doorstep lenders, or loan sharks, who will make it even more difficult to find a way out of indebtedness.

Unfortunately, despite all the evidence indicating this is a shared problem with indebtedness being widespread across Great Britain, many people still associate it with stigma and are reluctant to discuss their circumstances. This means that they won’t seek the help they need to help get out of these kinds of situations, or know how to access the kinds of institutions that can help them.

The good news is that there is a whole community finance sector who are seeking to bridge gaps in provision and work with some of those experiencing the highest levels of disadvantage. The community finance sector can offer much better rates of interest than payday lenders, doorstep lenders or high-cost interest credit from stores.

Credit Unions across Great Britain work to fill the gap where mainstream banks have retreated and work with people who need access to affordable finance. They will often structure their loans so that when people are paying them back, they will also build up a small level of savings to help them avoid getting into difficulties in the future.

Similarly, Community Development Finance Institutions (CDFIs) have been lending to social enterprises and small businesses for decades. They provide micro finance into some of the neighbourhoods experiencing the highest levels of disadvantage and can otherwise feel forgotten by mainstream banks.

Credit Unions are community savings and loan cooperatives, where members pool their savings to lend to one another and help to run the credit union. A cooperative is an organisation which is owned by and run for the benefit of the members who use its services.[5]

The way Credit Unions are structured means that the people who save or borrow through one must have a common bond, for example they live in the same area, work for the same employer or have the same profession. They can also be members of the same church or trade union. They are run on a ‘not for profit’ basis. Instead of paying a profit to shareholders, they use money they make to reward their members and improve their services. Some have thousands of members, while others are much smaller.

There is real potential to make a huge difference to the residents in your neighbourhood by working with a Credit Union. In the long-term North West Ipswich Big Local project for example, by deeply engaging with residents on the things that were important to them, the project leads realised that access to fair finance was an important issue. Even if the issues residents were describing were actually about the anxiety of a fridge breaking down, the presence of loan sharks and concern about paying the bills. The Big Local worked with their local Credit Union by loaning them money to lend in locally-targeted areas, plus a small grant for outreach work to raise awareness of their offer and promote fair finance. By doing so, they estimated that they saved residents up to £10,000 from the interest rates they would have been charged by more unscrupulous lenders.[6]

At a time where people are likely to face many challenges from loss of income due to the effects of the pandemic, added to the financial pressures that the festive period brings, it’s important that people feel encouraged to speak about the issues.[7] As part of the conversations, people can then learn about access to fairer finance and debt advice to make debt manageable and improve the levels of control they have over their life. Access to fair finance is a key element of our income and has far-reaching impacts for both mental health and material security.

To learn about where your nearest Credit Union is to join, or work with, you can explore: https://www.findyourcreditunion.co.uk

To read more news from the Trust, click here.