Charity warns that low-income households are increasingly turning to high-interest loans

Research from a leading anti-poverty charity shows that Brits are taking on growing levels of debt amidst the cost of living crisis.

The survey, conducted by the Joseph Rowntree Foundation shows that one in ten low-income households (defined by earning £25,000 or less per year) have turned to credit to cover bills over the past 12 months. In 2022 alone, those on low incomes added £12.5bn of fresh debt, with the final figure now totalling £22bn. Unfortunatley, this growth does not appear to show any sign of slowing.

“What we’ve also seen is that 870,000 households are planning on doing that in the coming months,” said Rachel Earwaker, senior economist at the Joseph Rowntree Foundaiton.

“I think that gives you an indication of what is to come. We’re now seeing some of the impact of high prices but a lot of that won’t have kicked in yet, so I think it absolutely will get worse before it gets better.”

JRF’s study coincides fittingly with a return to the market for Amigo, who were recently forced to compensate customers for selling unaffordable loans. Under the new name ‘Rewardgate’ they will be offering a range of products, including personal loans with a 49.9% annual APR. While this might sound excessive, it falls within the limits of what the Financial Conduct Authority (FCA). Some regulated lenders have loans with APR’s in excess of 1,200%.

With the cost of living crisis continuing, concerns will only grow that many households will be forced into riskier financial situaitons. Many loans come with eye-watering late fees, which become worse if and when and if they are passed onto a debt management company. Similarly, those with bad credit scores may find themselves borrowing from illegal sources. JRF’s research showed that over two million households are in debt to loan sharks.

Inflation is currently at 9%, it’s highest figure since the 1981. While this is being largely driven April’s 54% increase in energy prices, Brits are also finding themselves paying more in other areas including supermarkets and for petrol. Chancellor Rishi Sunak has announced a range support measures, with a focus on particularly vulnerable households. However, Katie Schumaker, principal policy advisor as JRF does not believe it goes far enough.

“Families up and down the country have been faced with options that are simple but grim – fall behind on bills, go without essentials like enough food, or take on expensive debt at high interest. In some cases they had to do all three,” she said.

“No one should be put in this precarious position. The hardship families are facing now builds on the foundations of a decade of cuts and freezes to social security. 

“The Chancellor’s cost of living support package will offer some temporary relief, but rather than lurching from emergency to emergency government must get ahead of this problem.”