High cost of credit sends a growing number of Britons into poverty

Campaigners call for a crackdown on lenders who charge exorbitant interest rates

(Jason Alden)

Rising levels of poverty are putting millions at risk from spiralling debts, with the Government facing renewed calls to crack down on lenders who make large profits by exploiting the poor.

Those on benefits and the working poor are at greatest risk, according to new government figures which show that the number of payouts to people forced to appeal for emergency financial help from the Government has almost trebled in only five years.

Poverty-stricken adults from some of the most vulnerable groups in the community applied for more than 3.6 million "crisis loans" in the last financial year – up from 1.3 million in 2005-06. The situation is likely to worsen, with continuing cuts, job losses and a VAT rise next month. A rise in interest rates could cause serious financial hardship to thousands of homeowners.

Jenny Chapman, a Labour MP, will call next week for protection for people on low incomes targeted by loan companies when she introduces a bill demanding tighter controls on "easy" credit advertising on television and radio.

"When public-sector redundancies, housing-benefit and general-benefit reductions kick in, as fuel costs continue to escalate, and when the interest rates go up, it is likely that as many as one in 10 homes in the UK will soon be in serious debt," said John Franks, the operations manager at the charity Community Money Advice. "It's a national crisis."

The number of mortgages deeply in arrears has been more than a quarter of a million since 2008, according to a report by the Joseph Rowntree Foundation, released this month. It warns: "The potential exists for a sharp rise in numbers [of repossessions] at some point in the future if lenders deem that to be in their interest."

In a further sign of growing poverty, the Government confirmed yesterday that job centre staff will start issuing vouchers for people to exchange for emergency food supplies. The scheme will begin next month and roll out nationally in April.

A record 2.1 million working families are living below the poverty line, and controversial reforms to welfare and taxes will push almost a million more people into poverty by 2014, according to the Institute for Fiscal Studies. Families are being urged to resist the temptation of taking out expensive loans over Christmas.

Personal debt is now at £1.5trn – more than the UK's gross domestic product. It is those least able to pay that are hit the hardest, with people having little option but to resort to what campaigners condemn as "legal loan sharks" – companies reaping the profits of exorbitant interest rates of up to 2,600 per cent a year. Amid mounting concern over the extent of the problem, Parliament is to debate, early next year, the need for a bill to regulate the advertising of credit and debt management services. Almost 200 MPs are in favour of a cap on interest rates charged by lenders.

A Consumer Credit Bill proposed by Stella Creasy MP – which would see the cost of credit capped and a levy on credit card companies to fund the provision of debt advice services – will receive its second reading in February. High rates of credit were blasted as "immoral" by Barnardo's chief executive, Martin Narey, yesterday. "The repayments will drive decent working families into deeper poverty and deeper despair in the new year," he said.

It is not just the poor that are going to be hit. Many middle-class homeowners are expected to fall into serious debt if interest rates rise. Gavin Hayes, the head of the left-wing think-tank Compass, said: "With the VAT rise, stagnant incomes and unemployment increasing, more and more people are going to have even greater pressure on budgets and be driven into the hands of high-cost lenders. The key point is that the bank base rate is only 0.5 per cent. Interest rate increases will happen; it's just a matter of by how much and when. Either way, it's a debt time bomb waiting to go off."

Sian Williams, the head of financial inclusion at the social welfare charity Toynbee Hall, said: "In the long term, we expect to see previously financially stable and asset-rich individuals falling below the poverty line and becoming dependent on doorstep lenders, and possibly even on loan sharks. Our society gains nothing by allowing even more families to fall to a level of poverty from which they have no hope of recovering."

The high-cost credit sector – including pawnbrokers, pay-day loan and rent-to-buy credit companies – is worth more than £7bn. Provident Financial, Britain's biggest doorstep lender, saw its shares soar 66 per cent last month.

At the other end of the scale is the Government's social fund, which helps those in greatest need. Crisis loans, available to the unemployed and the working poor, are intended to cover emergencies, but "must be the only way of preventing serious damage or risk to the health or safety of the person or their family". The loans, which are interest free but have to be repaid, face reform. A Department for Work and Pensions spokesman said: "We will localise elements of the social fund so that it is administered by those who best understand local need."

Case studies

David Dales, 60

His IT business went under and the pressure of his debts led to a mental breakdown

"I had to apply for Job Seeker's, but there were complications and delays and I ended up homeless. The whole thing caused me to fall into a massive depression. I took an overdose and was then sectioned. I was in £49,500 of unsecured debt to mainly banks. I applied for bankruptcy in September and things have improved for me because I don't have all that worry.

"I never expected to find myself in a situation like that. I had a good living and, although I had debts, I could service them. There needs to be more easily accessible information about how to deal with debt."

Karen Sheppard, 39

Levels of credit card and catalogue debt spiralled out of control and left her on the verge of abandoning her husband and three children

"I was seriously considering walking away from my family because all the debts were in my name and I thought that that would allow them to get on. We were literally living off £20 per week to feed all five of us. I dropped my friends because I couldn't afford to go for a coffee and I didn't want to have to admit to them the trouble I was in. Being in debt can isolate people. You never stop thinking about it. We're not extravagant people. We have never been on a foreign holiday as a family. We don't own a car and we don't wear designer labels. Our debts were just incurred through bad decisions.

"I was in £10,000 worth of debt. Now I think we will be debt-free in about 15 months, which, before Christians Against Poverty got involved, I couldn't see happening."

Beyond the crisis: Banks prepare for bonus storm

Not long after the turkey has been finished, the presents broken and the tinsel stored for another year, millions of Britons will be calculating the true cost of Christmas as credit card bills land on the doormat.

The bills will start to arrive around 17January, the third Monday in the month, which has been called "the most depressing day of the year".

However, it's not depressing for everyone. At about the same time, 315,000 City workers will be rubbing their hands with glee at the news of their bonuses as bank bosses carve up a £7bn pot, says the Centre for Economics and Business Research.

While well below the record £11.6bn paid out in 2007, this handsome pot comes despite government promises to rein in greedy bankers after taxpayers were landed with a £850bn bail-out bill last year.

The Government knows that amid mounting fury about massive rises in university tuition fees and housing benefit cuts, million-pound banker bonuses will spark fresh public outrage.

This is why, after several months of silence on the issue, the Prime Minister warned the banks last Friday that they faced higher taxes if they continued to pay "unjustified" bonuses. But the gentle arm-twisting hasn't worked. Bank bosses insist that if they don't pay up they will lose their best staff to Asian banks where the work is plentiful, bonuses generous and taxes low.

Some money has been clawed back. Labour raised £2.3bn by introducing a one-off windfall tax of 50 per cent on bonuses over £25,000 between December 2009 and April 2010. Having rejected pressure to introduce a Robin Hood tax on international banking transactions, the coalition has instead introduced a levy from next month. This should raise £2.5bn a year, although changes to corporation tax introduced at the same time will leave some banks better off, analysts say.

The Financial Services Authority will introduce in January new rules on pay agreed this month by the Committee of European Banking Supervisors. British banks must pay at least 50 per cent of bonuses in the form of shares, which bankers cannot cash in for several years.

These changes are unlikely to ease public anger as tens of thousands of public sector workers face redundancy. Once word spreads of bumper payouts, banks and financial institutions will be preparing to fend off some rage.