'Vulnerable' consumers pay higher credit costs
Low income consumers are typically paying £174 a year in extra costs on credit from high street lenders by building up charges as they try to juggle their finances, a report has warned.
Some of these "vulnerable" people can end up paying more for credit from mainstream lenders than they would have done had they taken out a high-interest short-term loan, the document by Policis and Liverpool John Moores University argued.
This is because they are more likely to incur extra charges by falling behind on direct debits, racking up overdraft fees and only paying the minimum repayments on credit cards.
Yearly, 3.6m borrowers on a low income are paying such "behaviour-driven" costs which total £630m, the report found.
The document said the "harsh reality of life on a low income" meant those who are less well off are not just paying high charges for loans which are well known to carry high interest rates like payday loans, but also find themselves paying more for mainstream credit like credit cards and overdrafts, which may appear to be more attractive deals.
As a result, the cost of credit for products with a low APR can outstrip products with a high APR in some cases, the report said.
Danielle Walker-Palmour of the Friends Provident Foundation, which funded the research, said: "The debate needs a reality check: it is important to recognise that for a significant minority of low income borrowers, mainstream credit products can be both high cost and high risk.
"For some low income consumers, high APR products are a way of avoiding bank charges and managing short-term gaps in their income, despite their high cost."
The report found that someone taking out a £500 overdraft over 12 months at a standard rate of 19.9% APR could end up paying £39 per £100 borrowed if they defaulted seven times over the year, making the actual APR cost 76.7%.
The report, entitled Credit and Low-Income Consumers: a demand-side perspective on the issues for consumer protection, said that payday borrowing, averaging £275, represents less than 5% of total indebtedness for those who take out payday loans, with credit card debt representing 45% and other mainstream credit agreements making up over half.