Cost of living crisis drives 3 million cash-strapped Brits to 'dangerous' loan sharks, study finds

The cost of living crisis has driven three million Brits to loan sharks, new research has found.

Illegal lending is a risky business, often involving eye-watering interest rates and the threat of physical violence. But almost one in 12 UK adults have turned to an illegal lender over the past three years, a report by financial inclusion organisation Fair4All has shown.

Some 7% of GB adults (3.3 million people) have used, or believe someone in their household has used, illegal moneylenders since 2021.

The research also found that 15% of GB adults are aware of an unlicensed lender operating locally.

• ‘Breaking point’: Debt charities and ethical lenders fight to save families from loan sharks

A lack of affordable short term credit drives people into a vicious cycle of borrowing from illegal sources, said Niall Alexander, credit and consumer markets lead from Fair4All Finance.

“Increasingly, lower income households have few or reducing options when it comes to accessing legal forms of credit, even the most expensive forms,” he said.

“What happens to those people when they need credit and can’t get it… Does their need for credit go away with a refusal? In some cases they may go without food, sell possessions or make other difficult choices. It is clear that others are enticed, whether by choice or through deceit, into borrowing from unregulated lenders.”

Some 16% of those declined for regulated credit had either used a loan shark or knew that someone in their household had, compared to 5% of those who had successfully applied for mainstream credit

The data ought to be a “major concern” to policy makers and regulators, he said.

“We hope that this report encourages those groups to consider practical steps to reshape the credit market and stem the growth of illegal lending,” Alexander said.

Why do people need to rely on loan sharks?

Sky-high bills and soaring prices are driving increasing numbers of people into debt.

According to new Trade Union Congress figures, just one in seven people think their living standards are improving this year. And earlier this year, a survey for Debt Justice found that 13% of adults had missed three or more credit or bill payments in the last six months, a figure that rose to 29% among 18- to 24-year-olds and a quarter of 25- to 34-year-olds.

This kind of desperation drives borrowers to illicit sources of credit, said Neil Kadagathur, CEO of responsible lender CreditSpring.

“Illegal lenders thrive on the desperation of borrowers who have exhausted all their mainstream options and are left with nowhere else to turn,” he warned.

“These predatory lenders often offer extortionate interest rates and additional fees which borrowers have little choice but to accept – if an illegal lender whacks on an unexpected charge, there is no formal complaints process to support borrowers.”

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CreditSpring research shows that people are turning to loan sharks to put food on the table.  

One third (31%) of respondents said they now feel stuck with no way of improving their financial situation, while a fifth (19%) said they turned to an illegal lender to cover the cost of everyday expenses like food and household bills. A sixth (15%) said they needed the loan to pay their rent or mortgage.

While the cost of living crisis grinds on, the need for borrowing will continue to rise. As this demand surges, the Big Issue blueprint for change has called on Westminster leaders to make loans and credit sources affordable, equitable and fair.

Too many people are priced out of borrowing, leaving them feeling like a loan shark is the only choice.

The UK consumer credit market has grown by more than 50% in the past year, but the three forms of credit most commonly available to lower income customers pre pandemic now account for just 0.3% of lending. This is down from 4% in 2013.

UK banks should consider emulating the success of ‘small dollar loan’ products in the US, Fair4All suggests.

“Getting the right balance between consumer protection and consumer access to credit is tricky, but it is clear that as it stands, the market is excluding too many people,” said Alexander.

“Mainstream finance must be more innovative and develop new products to address the credit vacuum for those on lower incomes, left behind communities and other disadvantaged groups.”