We estimate that four in ten UK adults would not be able to meet all of an unexpected £1,000 expense without borrowing:
- four in ten (37%) of this group report they are not able to afford any additional payment after meeting their essential costs and existing credit commitments; and
- a further three in ten (28%) report they can afford to repay less than £50 a month after meeting their essential costs and existing credit commitments.
This means an estimated 7.7 million UK adults who would need access to credit to cope with an unexpected expense would not be able to afford to repay a loan, and a further 6.1 million are likely to be able to afford to repay only low cost credit.
Cost of living pressures are the biggest driver of affordability problems: 84% of those who are unable to afford to borrow say they find it difficult to keep up with household bills and credit commitments. But over-indebtedness also has an important role: two-thirds (64%) of those who could not afford to borrow say they are struggling with existing credit repayments.
The research shows there is a significant mismatch between the availability of credit alternatives like crisis support grants and affordable credit and the number of UK adults in financially vulnerable circumstances.
This leaves too many people with an impossible choice between unaffordable borrowing or going without meeting essential needs.
Credit cannot solve the problems that arise from shortfalls in income from work and the social security system. But grants and affordable credit can help households manage budgeting pressures, navigate financially challenging life events and avoid problem debt that deepens poverty and hardship.
Increasing the ability of households to withstand and recover from financial shocks will also further the Government’s growth agenda because more resilient households support a more resilient economy that is better placed to grow sustainably.
Recommendations
To address the gap in safe options for people struggling with living costs, StepChange is calling on the Government to prioritise increasing access to credit alternatives and affordable credit through its forthcoming financial inclusion and child poverty strategies:
- The Westminster Government should put the Household Support Fund, which provides funding to local authorities in England for small emergency grants, on a permanent, statutory footing, extend the scheme to meet larger transitional payments like repairs and white goods, and separate funding for holiday free school meals from the scheme.
- Following the present Fair4All pilots of a no-interest loan (NIL) scheme, the Government should introduce a national NIL scheme to expand access to safe low-cost credit.
- The Government should use the forthcoming Financial Inclusion Strategy to agree a framework coordinated with the financial services industry to catalyse an expansion of affordable credit, and commit to legislate to achieve this objective should progress not be made over the strategy period.
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