Even though the UK is no longer in a recession, many people on lower incomes are still facing financial exclusion due to strict lending criteria from traditional banks and mainstream lenders. This has created an opportunity for loan sharks to exploit the financial vulnerability of these individuals. Fair4All Finance, a financial inclusion organization, is urging the mainstream financial sector to address this credit gap.
The organization suggests that UK banks should consider adopting the successful ‘small dollar loan’ products from the US, which provide sub-$1,000 loans to lower-income households. Despite the UK consumer credit market growing by over 50% in the past year, the options for lower-income customers have significantly decreased, with only 0.3% of lending now available compared to four percent in 2013.
As access to finance diminishes, many individuals are turning to unregulated and illegal lenders for assistance. Fair4All Finance reports that around 3.3 million people in the UK have used or know someone in their household who has used illegal lenders in the past three years. Additionally, 15% of adults are aware of unlicensed lenders operating locally.
To combat the rise of illegal lending, Fair4All Finance recommends mainstream financial institutions to innovate and develop products that cater to the credit needs of lower-income individuals. Currently, only one major UK bank offers a similar product to ‘small dollar loans,’ indicating a significant opportunity for improvement in lending accessibility.
The organization also suggests expanding affordable credit providers, potentially through investments from mainstream financial institutions that have contributed to the credit gap. They propose integrating income maximization tools, such as benefits calculators and grant finders, into the loan application process to assist customers in managing their finances effectively.
By taking these steps, Fair4All Finance aims to curb illegal lending practices and provide better financial options for those on lower incomes in the UK.