Eking out the pennies...
08 Aug 2012

Times are tough out there, the economy isn’t growing, unemployment is high, diesel is £1.40 a litre, food bills have rocketed and in real terms most peoples incomes have been shrinking over the past 4 years or so, as inflation outstrips wage rises by some margin.

Of course it is fair to say that personally having a relatively senior professional job, I am somewhat privileged and to an extent insulated from these micro economic effects. However we all have months where the outgoings look like totalling more than what is coming in. Last month for example I had car insurance, car tax and I ruined a tyre on my car, which needed to be replaced (well actually Mrs Golding did but don’t tell her I dobbed her in) and these things all drain cash from normal monthly expenditure routines.

So you whack the car insurance on a credit card and pay it next month. It’s what people do. However taking into account what I said in the opening paragraph, for many the over spend is a regular monthly occurrence and debt spirals to an extent where by the third week of the month there is simply nothing left.

This phenomenon is why the UK has seen a surge in the number of short-term lenders offering quick and easy cash at the end of the phone or with the click of a mouse. But this is a real worry. This is a market designed to serve a clear need, however it serves that need in an extremely mercenary way with huge interest costs that in my opinion serves only to make the problem worse.

Yesterday I had the pleasure of meeting the Chair and Vice Chair of Kent Savers Credit Union (KSCU). A tiny organisation set up initially with funding from Kent County Council, which aims to service the needs of the people of Kent where traditional finance providers can’t or won’t help.

Now I have been aware of the credit union movement for a number of years as of course they are mutuals operating in communities, but the story has been mixed, with some failing and few seemingly able to grow. But KSCU’s purpose is to provide fair affordable loans to borrowers in Kent.

I am a big believer in the simplification of financial products and services. Unfortunately regulation, clever marketing and promotion targeted at specific segments have made the market a minefield for the inexperienced. Just look at the plethora of television adverts showing ordinary people in need of some cash and how happy they look once “rapid pound” or “dosh.com” (poetic license on names of course) have lent them a few hundred pounds.

Firmly of the view that this new breed of moneylender is preying on vulnerable people I decided to put it to the test. I used the online calculator of one of the heavily advertised short-term lenders to see how much it would cost to borrow £300 over 30 days. I was shocked when it said £96.19. Yes for my £300 loan over 30 days I would have to pay back £396.19. That is an annualised interest rate of over 4,000%.

So the same test with KSCU and I was shocked again. It was £6 so after the 30 days I would repay £306. So I know where I would be going if I needed short-term cash.

We must do something in this country to protect vulnerable people from these kinds of practices. I am a great believer in pushing hard for better financial education and easier to understand products. But providers must do their bit too.

I have ideas for a Kent Mutuals day later this year, where Kent Reliance, KSCU and other Kent based mutuals, owned by and run for their customers, promote fairness and financial inclusion and do our bit for the people of Kent.

But the government must in my view do more too. Or the cycle of spend, borrow, get into difficulty and borrow more at ever increasing costs will continue.

Sounds a bit like Greece doesn’t it?