youthmoney

There aren’t many options for low-income households wanting to borrow money.

Credit unions are a very  good choice. Their loans are designed to be affordable. Members can be encouraged to save as they make repayments. Some unions offer financial education and other support.

Loan sharks are disastrous. Their loans are illegal, very expensive and very difficult to pay off. Rather than help, they offer intimidation and threats of violence.

How much is the difference in the cost of the loan? Andy Doylend, from Circle Anglia, a provider of affordable housing, takes the example of loans to fund Christmas spending. Borrowing from a credit union instead of a loan shark could save a  typical low income household £500 in debt repayments, he says. “More than enough to fund the whole of Christmas 2010 as well.”

The Financial Inclusion Centre has estimated that £29 million in illegal doorstep loans were taken out over the holiday. It calls it the worst Christmas in a generation for this type of borrowing.

The centre estimates the average amount borrowed by households to cover Christmas at around £288. Interest rates of loan sharks can be around 825 per cent, with some as high as 1,500 per cent. A typical borrower will pay off £820. Many will take at least 56 weeks to repay their loan. A large number of Britain’s poorest households will still be paying off this year’s debt as next Christmas approaches
An estimated 200,000 households a year borrow from loan sharks. That is a 22 per cent rise over the past three years.

Why is business booming for loan sharks?  The simple answer is lack of known alternatives, made worse by the credit crunch. Doorstep lenders – legal ones, who specialise in home loans to low-income families – were affected as other lenders were. One company, London Scottish Bank, went bust. Another, Cattles, scaled back its operation and massively reduced the loans it made.

That created the vacuum that the loan sharks moved to fill.

Loan sharks do not generally target young people. Their victims are usually householders on estates, with young families. But young people will be targeted by them when they get older and take on responsibilities. Which makes now a vital time to learn about the risks, and build up a habit of saving and affordable borrowing – of which credit unions are the best option.

Two moves for anyone working with young people:

• help them explore credit unions. The best starting place is the Association of British Credit Unions. The search page tells you what is available in your area.
• let them know about loan sharks. A good place is the government’s loan shark website.