Universal credit will push people into 5,000% APR loans
Last week, on the BBC’s Daily Politics, I commented that the new universal credit system is likely to cause a budgeting bloodbath. Yesterday I was pleased to see a report from the Social Marketing Foundation echoing this (see the Monthly benefit payments ‘risk backfiring’ MSE News story).
This is all about a nightmare transitional issue. As part of this benefits system change, many will be shifted from getting their money weekly to monthly. Some will also be responsible for paying rent directly for the first time (instead of it going direct to landlords).
Even some working people on substantially higher incomes struggle to manage this type of budgeting (see the Budget Planner for help on it).
Yet it’s likely to be much more of a struggle for some on benefits for two reasons…
- Financial capability issues amongst some benefits recipients. There are many factors that impact this: mental health, mental capacity, literacy, numeracy, educational achievement and many more. All of these make the process of effective budgeting more difficult to achieve.
- Lower incomes make budgeting more difficult. The less you earn, the more difficult budgeting is. Less cash means any small unexpected expenditure disproportionately impacts the overall sum.
It’s not difficult to see why this scenario paints a likely picture of people unused to monthly money being given the larger sum, but spending it long before the month ends. That’s human nature, especially for the many without the skills to manage their money effectively.
On the back of that, this Department for Work and Pensions quote gave me a wry smile:
"We are working with local authorities and the financial industry on how best to support individuals."
My suspicion is the most relevant part of the financial industry for this are payday lenders, the short term loan companies with APRs of up to 5,000%. When people have low incomes and no cash, they are sadly becoming the first port of call (or worse, illegal loan sharks).
These firms are already taking over many depressed high streets across the country. Many have moved from abroad, having been closed down elsewhere. They see the UK as a pot of gold due to weak regulation. This benefits payment date change is likely to make some of them salivate.
The Government needs to engage in solutions to this – or money being paid out as a benefits safety net to those who need it will be going in the payday lenders or loansharks’ pockets instead.
I’d love to know your thoughts (reply below).
Related blogs/News stories
