‘Unscrupulous lenders’ are ‘ripping off the poorest with extortionate charges’, according to a new report from children’s charity Barnardo’s.
According to the report, credit providers are charging low income families up to two and a half times (150%) more to rent-to-own basic household items such as cookers or fridges than it would cost to buy them at full price from a high street provider.
How do weekly payment stores work?
Weekly payment shops work on a similar basis to catalogues. You buy and receive your item now, but pay for it over a longer period, usually with interest (typically 29.9%).
Barnardo’s does not reveal in its report which weekly payment store it has used in its example. We’ve chosen one well-known chain to illustrate how this type of retail model works: For example, a Philips television on sale from one weekly payment store’s website retails for £1,373. If you spread payments over the advertised period of 156 weeks (three years), you’ll repay £12.67 a week, or £1,977 over the three years. That’s £604 in interest.
If you choose the optional service cover as well, you’ll pay an extra £6.82 a week. With this option, you’ll repay a total of £19.49 a week for the TV, or £3,040 over the three-year term.
A ‘morally bankrupt lending industry’
Barnardo’s Chief Executive Anne Marie Carrie said: ‘In these tough economic times, the most vulnerable families in society are being lured into an unaffordable debt trap by a morally bankrupt lending industry. The poorest families are stuck between a rock and a hard place, with one in ten households on low incomes managing their finances without access to mainstream banking services.
‘Preventing families from resorting to exploitative rent-to-own agreements involves providing both good financial advice and fit-for-purpose bank accounts for those living on the tightest budgets. We’re calling on the Office of Fair Trading to help protect families from being unwittingly pushed further into poverty by compelling these unscrupulous lenders to make clear their extortionate rates.’
Barnardo’s calls for government action on credit
Barnardo’s ‘Vicious Cycle’ report calls for the implementation of three key ‘pillars’:
- Ensuring the poorest have access to low or free-interest loans and advice when they face emergencies
- Reducing demand for high-cost credit by encouraging the poorest families to save up for essentials rather than borrow for them
- Ensuring that all have fair access to mainstream financial services either through a bank or post office card account.
Mainstream banking fails to cater for low earners
Which? debt expert Martyn Saville added: ‘Some of these stores show the weekly cost of buying an item prominently on their websites. However, what is less obvious is the period over which consumers are borrowing, and the interest rate they’re paying. Too often you have to click through or scroll down the page to find the true cost of borrowing.
‘Barnardo’s report calls on the Office of Fair Trading to enforce stricter rules on rent-to-own lenders that would compel them to clearly display the high street equivalent prices of the products they sell. If they did this, not only would many people shop around for a more competitive deal, it may also encourage many to consider better-value alternatives such as their local credit union.’