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Borrowing money is often a necessary part of budgeting well. Financially excluded people are more likely to use the most expensive forms of credit.

Promoting more affordable loans is key to breaking the cycle of poverty and debt.

Affordable Credit

Sources of affordable credit - Policy and Research 

Many of the most convenient ways to borrow money are also the most expensive. Home credit, pawnbrokers and payday loans charge some of the highest interest rates around. High street banks charge less interest, but getting a loan can take time and some people won't be given a loan, due to a poor credit history for example. LendersCompared is a website which shows to cost of cash loans from home credit companies and credit unions.

Sources of Affordable Credit

Affordable credit is available through 'third sector' or 'not for profit' lenders. They are often the best deal for small, fast cash loans - the type of loan most needed by financially excluded people.  There are three main groups of not for profit lenders:

The Social Fund is part of the government's tax-benefit system. It provides grants or loans to people on low incomes for essential expenses and is administered through your local Jobcentre Plus. The Social Fund includes funeral payments, maternity grants, crisis loans, budgeting loans, community care grants and cold weather payments. Winter fuel payments are also a type of Social Fund payment, but they are restricted to people aged 60 and over.Click here to download a Social Fund factsheet.

Credit unions are financial co-operatives which offer savings and affordable loans to their members. Some also offer other banking services such as current accounts. Members must all have a 'common bond', such are working together or living in the same area. The Association of British Credit Unions Ltd (ABCUL) is the main trade association. You can search for credit unions on their website.

Community Development Finance Institutions (CDFIs) provide capital and support to individuals and organisations who aim to create wealth in disadvantaged communities. The Community Development Finance Association (CDFA) is the UK trade association for CDFIs. You can search for their member CDFIs on their website.

Credit with a Social Mission is a nef think-piece which argues that CDFIs should align themselves with the international microfinance movement. Click here for a summary or click here to access the full publication. (nef, 2008)

Reconsidering UK community development finance looks at the progress this sector has made and the impact it has (nef, 2007).

The Growth Fund

One of the government's key priorities is to extend the supply of affordable credit to financially excluded people. It has provided £36 million through the DWP Growth Fund for credit unions and CDFIs to achieve this. Click here to see the list of organisations growth funded to deliver affordable credit.

Policy and Research

Research has identified this problem and looked at how more affordable credit can be offered to financially excluded people: 

Financial Inclusion Taskforce

The Financial Inclusion Taskforce has a working group which considers how to improve the coverage of third sector lenders in the UK, the working group has published a number of reports. 

In November 2007 the Financial Inclusion Taskforce and Experian published research into the supply and demand for affordable credit in the UK. This research identified areas in the UK there is a severe mismatch between the demand for and provision of affordable credit. 

View the report here: Mapping the demand for, and supply of, third sector affordable credit (Experian 2007) 

'red alert' mismatch map 

Demand map

Supply map

Tables

GfP NOK have been monitoring the impact of the Growth Fund on third sector lenders. View the Financial Inclusion Taskforce papers on conclusions and implications of GfK NOP affordable credit research here: 

"Access to affordable credit: baseline survey of Growth Fund catchment areas” (2007)

"Access to affordable credit: second wave survey of Growth Fund catchment areas” (2008)

The Financial Inclusion Taskforce published Access to Financial Services for those in the margins of banking, which includes findings on how financially excluded people access credit. (2006)

Other research

OFT High Cost Credit Review: This report assesses whether the high cost credit market such as pawnbrokers, payday loan providers, home credit etc is operating effectively and providing consumers with adequate choices and fairly priced products. The review found that broadly the markets operate reasonably well and more deep-rooted issues with high cost credit would need to be tackled at a high level by government. (OFT 2010)

Doorstep Robbery: Why the UK needs a fair lending law states that there are nine million people in the UK who can't get credit from banks and so are forced to access credit from high cost lenders.The report recommends that the UK implements legislation to prevent excessively high cost lending and the possibility of introducing lending caps should be explored further. (NEF 2009)

Transitioning high risk borrowers to affordable credit looks at how third sector lenders can offer more services to financially excluded people (Policis 2008) 

Affordable credit for low income households looks at how low income households use credit, and the best way to increase their access to affordable credit (JRF, 2005)

Profiting from Poverty highlighted the problem of the poorest groups using some of the highest cost credit and predatory lending practices (nef 2003).