Debt
High-cost credit and how it works
Payday loans, doorstep lending and rent-to-own are designed around people with no alternatives, and there are usually alternatives.
High-cost credit exists because people with poor credit histories and urgent needs have few options, and the products are structured to profit from exactly that position.
The main forms
With their characteristics.
Payday and short-term high-cost loans, with annual rates in the hundreds of per cent, though regulation has capped costs in several markets.
The structural problem is repayment in full on payday, which frequently leaves a shortfall requiring another loan.
Doorstep and home-collected credit, with high rates and a collection relationship that makes refusal socially difficult.
Rent-to-own, where household goods are paid for weekly over years at a total cost frequently several times the retail price, with insurance and service cover added.
Logbook loans and similar, secured on a vehicle, which can be repossessed.
Guarantor loans, where a friend or relative becomes liable — which damages relationships and where the guarantor frequently does not understand the extent of the obligation.
Pawnbroking, which is relatively transparent and where the item is lost if not redeemed.
And illegal lending, which involves no regulation, no legal recourse and frequently intimidation, and which should be reported to the relevant enforcement body.
Why the rates are what they are
Stated fairly.
Lending small amounts for short periods to people with poor credit histories has genuinely high default rates and high per-loan administrative costs, which makes the arithmetic of low-rate small-sum lending difficult.
Which explains the rates without justifying the practices around rollovers, repeat lending and inadequate affordability checks that regulators in several markets have acted against.
Caps on total cost, restrictions on rollovers and stronger affordability requirements have substantially reduced the size of these markets in some countries.
The alternatives
Which frequently exist and are not known about.
Credit unions, which are member-owned, offer small loans at capped rates far below high-cost lenders, and exist in most countries with membership based on area or occupation.
They are the single most under-used alternative.
Community development finance institutions, which lend at lower rates than commercial high-cost providers.
Local welfare assistance schemes, providing grants or interest-free support for essentials in many areas.
Budgeting advances and hardship payments within benefits systems, which are interest-free and repaid from future payments.
Charitable grants, which exist for specific circumstances, occupations and conditions and are rarely applied for.
Employer salary advance schemes, which some employers offer without charge.
Arrangements with the creditor you are trying to pay, which is frequently cheaper than borrowing to pay them.
And furniture and appliance reuse schemes, which are the direct alternative to rent-to-own.
The arithmetic of rent-to-own
Worth doing explicitly.
Compare the total amount payable — weekly payment multiplied by the number of weeks, plus any compulsory insurance and service cover — against the retail price of the same item.
The multiple is frequently two to three times.
Against which a second-hand equivalent, a reuse scheme, a credit union loan or saving for a few months are all substantially cheaper.
Regulators in several markets have capped these costs, which reduced but did not eliminate the gap.
If you already have high-cost credit
Practical steps.
Stop taking new loans, since rollover and repeat borrowing is where the cost accumulates.
Contact free debt advice immediately, which will assess the whole picture and negotiate.
Cancel any continuous payment authority if the payments are leaving you without essentials — you have the right to withdraw this in many jurisdictions, and the debt remains but the immediate crisis eases.
Check whether the lending was affordable when granted, since irresponsible lending complaints have resulted in substantial redress in several markets.
Complain to the lender and escalate to the financial ombudsman or equivalent if unsatisfied, which is free.
And prioritise correctly: essential bills before unsecured high-cost debt, however aggressive the collection.
The affordability question
An important consumer protection.
Regulated lenders in many markets must assess whether lending is affordable, considering income and essential expenditure rather than only credit history.
Where they have not, borrowers have grounds for complaint and redress — including refunds of interest and charges and removal of adverse credit entries.
This has been applied at scale in several markets, including retrospectively.
Free advice services will explain the process, and it does not require paying a claims company.
Breaking the cycle
Structurally.
A small emergency buffer, however slowly built, is what prevents the next unexpected cost becoming a loan.
A benefits check, since unclaimed entitlement is frequently the gap being filled by borrowing.
Social tariffs for energy, water and broadband.
Joining a credit union before you need one, since membership and a savings record improve borrowing terms.
And free debt advice at the first sign of difficulty rather than at crisis point, since options narrow as arrears accumulate.
General information only, not financial advice. Contact a free regulated debt advice service, and report illegal lending to the relevant enforcement authority.
