Shark attack

“They came to the door last Christmas and asked if I wanted a voucher to help with presents. It was there and it was easy.” Keran Keppel, a tenant of a registered social landlord in Ipswich, is recalling the day she was first approached by a loan shark. She borrowed £100 worth of vouchers and paid £30 of interest.

Soon she was getting letters from the doorstep lender offering a cash loan.

She wanted to take her children on holiday, so she borrowed £300 and was charged almost the same sum again in interest and the £30-a-week repayments ate up a large chunk of her £138 weekly income support cheques. “You find yourself getting deeper into debt,” she says.

Luckily, a neighbour told Keppel about Ipswich Credit Union, which provides loans at the much more reasonable interest rate of 12.7%. Now she’s on course to pay back the doorstep lenders and has even started saving with the credit union.

Ipswich is one of many community finance organisations taking on the sharks. Councils and RSLs are also allowing deposits for credit union accounts to be paid at housing offices and community centres and referring their tenants to unions. Social landlords are determined to tackle rent arrears – which rose among council tenants, for example, by £140m between 1997 and 2000 – and one way to do this is to make sure tenants aren’t handing over large sums to doorstep lenders.

Save and prosper

Almost all the UK’s 665 registered credit unions offer a savings and loan package where savers can borrow two or three times the amount they have saved. This gets members into the habit of careful saving.

However, some people need money immediately. To keep them out of loan sharks’ clutches, credit unions are beginning to adapt their products: Ipswich Credit Union, for example, provides loans to help customers pay off debts with doorstep lenders.

Compliance officer Sally Chicken says: “We do an assessment to see if it’s in their best interests to replace the loan; sometimes it’s better for them to continue paying it off themselves but have future loans with us. Often, the lenders have them pay the interest off first and then the capital. So, if they have already paid the interest, we don’t want them to have to pay more interest by taking out a loan with us to repay the first.”

Portsmouth Savers Credit Union takes a different approach. Manager Amanda Winkworth explains: “We looked at why potential members were going to doorstep lenders rather than us. They said it was because we were making them save for 13 weeks before they could borrow. A lot of them couldn’t – they needed the money immediately and would rather pay extortionate interest rates than wait.”

So in October 2002, almost two years after the credit union began, Portsmouth started offering loans based on ability to repay.

Customers could apply for a loan as soon as they joined the union and their ability to repay would be judged on proof of income and debts. It sounds risky but defaults decreased when Portsmouth started offering loans on this basis.

“In the past, people used to borrow beyond their capacity to repay but we wouldn’t have known,” says Winkworth. “Now we have more prudent lending conditions. We would lend people double what they had saved but people would run off with the money or bump up their savings with a loan from elsewhere and wouldn’t be able to repay both.”

Credit unions need more than good products to tackle loan sharks, however. They also have to beat them at the publicity game. A doorstep lender’s representative will often knock on the door just before Christmas or during the school holidays, offering tenants vouchers to buy presents or school uniforms. Other lenders send out catalogues offering household goods and toys that can be paid off weekly but at hefty interest rates. “They use some pretty cynical tactics,” says Sally Chicken. She recalls one firm charging 90% interest on a kettle and 200% on a Gameboy console. “One client said they approached disabled people outside the supermarket,” she adds. “They know they are on benefit and, if they have a problem paying, they can take them to court and have the repayment deducted from their benefit so the companies would see them as a safe bet.”

Rent arrears

To combat these tactics, Ipswich council and the credit union run leafleting campaigns at Christmas and just before the start of the school year. The leaflets tell tenants not to skip rent payments to pay for presents but to join the credit union instead. “Normally, we had a big blip in rent arrears at Christmas and in the school holidays,” says Karen Loweman, tenancy services manager at Ipswich council.

Arrears still go up at those times but now by much smaller amounts. The council’s arrears have fallen from more than £550,000 when the credit union was set up in 2001 to just over £400,000 now.

Ipswich’s housing office, community centres, Sure Start childcare schemes and community shops now accept payments into credit union accounts. Residents at several sheltered housing schemes can also have money collected from their doors.

Government proposals to pay housing benefit directly to tenants are adding to the pressure on social landlords to educate tenants in financial management (HT 18 June, page 34).

Sam Lister, policy officer at the Chartered Institute of Housing, says: “Will tenants be used to using bank accounts and paying the rent when it comes in? People need to sort out the issues surrounding this now.”

At the moment, the government is testing direct payment in the private sector but it looks certain to be extended to social landlords in the next few years.

London & Quadrant Housing Trust tested the idea of paying benefit to tenants from May 2002 to October 2003 for more than 200 households and found that arrears would have risen from £2.5m to £4.5m if all its tenants had been involved (HT 27 February, page 15). Financial advice to tenants could help to prevent such problems, says Jeremy Hutchings, head of revenue services at the association. “Financial awareness was less than we believed it would be.”

A few tenants believed the rent had been paid once the benefit was credited to their bank account and did not realise they had to pass it on to the landlord. Housing benefit payments being delayed and paid by cheque rather than electronic transfer also added to the arrears, says Hutchings, who wants local and central government to take action on both these issues.

One group of tenants signed up to the pilot in the L&Q office and were given basic advice on direct debits and benefits. The second group were notified of the pilot by post – arrears were somewhat higher among this group.

The £500m credit gap

More credit unions and similar community finance initiatives are going to be needed if housing benefit is to be paid to tenants.

Research for L&Q’s community finance project Change identified that London tenants had £500m of debt with non-mainstream lenders that could be provided by community finance organisations at reasonable rates. The study also found that large areas of the capital were not covered by credit unions.

Housing associations and councils could either offer backing to existing credit unions and community finance organisations, set up their own links with mainstream banks or offer a mix of the two as L&Q does.

For example, it has linked up with local credit unions to provide savings products and with banks to give basic bank accounts. The housing organisation could even see a return on the investment it put into the credit unions, says Amanda Winkworth at Portsmouth Savers. It would get a portion of the interest paid on the money when it’s loaned to customers.

There’s certainly demand for low-cost loans in Ipswich. Keppel is now a credit union convert and several of her friends have signed up too.

“I started saving once a week and now I’ve bought a table and chairs,” she says. “You pay hardly any interest and it is great, especially for single parents.”