Affordable credit for low-income households

The poor pay more for many things - but it is, arguably, the extent to which they pay extra for credit that puts the greatest strain on their budgets. Yet many poor people have to borrow for necessities. Access to high street credit is severely constrained for people on low and insecure incomes and most rely instead on the alternative credit market where APRs range from 100% to 400%. The dependence of many poor families on high-cost credit is a matter of widespread concern.

There have been a number of attempts to develop new low-cost credit products for people on low incomes but take-up of these has been modest and they have failed to make significant inroads into the customer base of commercial lenders. The reasons for this are not well understood.

This research study comprised five linked stages:

• A literature review and re-analysis of depth interview scripts.
• Focus groups with low-income borrowers of working age.
• A round table meeting with representatives of trade bodies and government departments.
• Interviews with commercial and non-commercial credit providers.
• Analysis carried out by Policis, of a consumer survey of access to and use of consumer credit among people on low incomes.

The findings from the research provide an in-depth profile of credit use among people on low incomes. Drawing on their experiences of using credit, the study then looks at what low-income borrowers want from a credit source, and the key features that their ‘ideal’ source of credit would include. It also looks at lending to people on low incomes, exploring the perspective of lenders and the distinctive features of lending in a high-risk market and the safeguards needed to contain the level of default.

Finally, the study brings these two perspectives together, to examine the size and nature of the potential market for more affordable credit and ways of reducing costs. It looks at whether competition will deliver more affordable credit, the potential impact of existing policy initiatives and other options for widening access to affordable credit, including changes to the discretionary Social Fund.

In addition to a main report and summary, the literature review and secondary analysis of depth interviews were written up as a separate working paper.

Affordable credit - the way forward [ Full report (PDF, 556kB) | Research summary (PDF, 48kB) ]
Affordable credit for low-income households (working paper) (PDF, 108kB)