100,000 families forced into debt by loan sharks

15th January 2010

Over 100,000 of the UK's poorest families will spend 2010 crippled with a combined debt of around £82 million after borrowing money from loan sharks to pay for Christmas 2009, according to a new report commissioned by Circle Anglia.

The Real Cost of Christmas report, which was authored by think tank the Financial Inclusion Centre, found that an estimated £29 million in illegal doorstep loans were taken out over the holiday season, making it the worst Christmas in a generation for this type of borrowing.  

Circle Anglia commissioned the research to highlight the issue after noticing an increase in the number of its residents being targeted by loan sharks, and has launched a campaign to raise awareness among residents, who find themselves in financial difficulty.

Evidence shows that on average people borrowed nearly £300 from loan sharks to cover the cost of Christmas, but with exorbitant interest rates averaging a whopping 825 per cent (some rates can reach as high as 1,500 per cent), they will pay back over £800. The average loan repayment period is a year, meaning that a large number of Britain's poorest households will still be paying off their debt in Christmas 2010.

The report also found that illegal loan shark activity is on the up in the UK. Over the last three years the estimated use of loan sharks increased from 165,000 to over 200,000 households per annum, a 22 per cent rise. As the recession continues to bite, loan sharks have moved in with loans from illegal doorstep lenders at Christmas time accounting for up to half of all loans borrowed from loan sharks in 2009.

Andy Doylend, Executive Director of Operations at Circle Anglia, said:

"These figures are very concerning and demonstrate the scale of illegal lending across the UK.  We hope that by turning the spotlight on loan shark activity we can help more people to seek help and get sound financial advice.

"A simple step such as borrowing from a credit union or a community finance organisation instead of a loan shark could have saved the typical low income household £500 in debt repayments, more than enough to fund the whole of Christmas 2010 as well.

 "The challenge in 2010, for all of us in the housing sector, is to make sure that we reach out to our residents to make them aware of the availability and accessibility of affordable finance and to help them manage their finances better."

Consumer Minister Kevin Brennan said:

"The Government has created specialist Trading Standards illegal money lending teams around the country so that they can come down hard on loan sharks. The teams have helped more than 10,000 victims and written off more than £30million of illegal debt.

"They have already secured around 50 years in prison sentences, helping to rid communities of these criminals. I'd encourage anyone who feels trapped by a loan shark to get help and advice as soon as possible."

Faisel Rahman, Managing Director of ethical lender Fair Finance and from the Debt on our Doorstep campaign, said:

"Millions of pounds are being taken out of the pockets of the poor by illegal and extortionate lenders every year. As the credit crunch continues, more people are being left behind by mainstream financial services.

"This, coupled with the downturn on the economy, means 2010 promises to be a very difficult year for low income and vulnerable communities. Social landlords should be active in developing local partnerships and promoting affordable alternatives to extortionate and illegal lenders, because every person deserves access to fair and affordable credit."

Key findings from the report:

- Nearly 100,000 households turned to loan sharks at Christmas in 2009

- The value of illegal loans taken out this Christmas was an estimated £29m

- The final cost of repaying Christmas 2009 debt, faced with exorbitant interest rates, will be £82m

- The average interest rate charged by an illegal money lender this Christmas was equivalent to an APR of 825 per cent

- A consumer taking out a £288 loan from an illegal money lender with an APR of 825 per cent will end up paying back nearly three times this initial amount (£820)

- It will take over a year before most families manage to pay back their Christmas 2009 loan shark debts

- Borrowing from a third sector credit provider like a credit union instead of a loan shark in 2009 would have saved a typical low income household £500 (based on an original loan of £288)