Memorandum submitted by Elaine Kempson,
Personal Finance Research Centre, University of Bristol (SF 41)
The Social Fund plays an important role for
some of the most vulnerable people in the United Kingdom. People
who apply to the Budgeting Loan scheme have a high incidence of
health problems, instability in their family or housing circumstances
and also tend to have been in receipt of benefit for extended
periods of time. Consequently, they have few other resources they
can call upon when they face unexpected expenditure for essentials.
They have nothing or very little in savings and they often have
no family or friends who are in a position to help. Nor do they
have many other options for borrowing money.
Social Fund Budgeting Loan applicants typically
have no access to credit from mainstream providers. The minority
who retain credit cards they took out when they were in work are
unwilling to use them as they see them as an all too easy route
into debt. The sources of commercial credit that are available
to them are very high cost (100 per cent APR upwards) and sometimes
have punitive penalties for late payment. Credit unions are so
thin on the ground they are available to very few people who would
be eligible to apply to the Social Fund.
The Social Fund is, therefore, highly valued
by its users. Recent research has looked at experiences of applying
for a Budgeting Loan since the simplified scheme was introduced
in April 1999. Few applicants were fully aware that the changes
had been introducedeven after they had applied. They did
notice and comment favourably on the simplified application form
and the speed with which decisions were reached on their applications.
They did not, however, understand the rules regarding the size
of loans awarded or the level of repayments. Most people received
much less money than they had applied for and some had had applications
turned down because they already had a loan. They did not understand
the reasons why they did not get the money they had applied for
and drew unfavourable comparisons with door-step lenders where
the rules on top-up loans are clear and easy to understand. To
make up the shortfall they borrowed from family when they could
or used high cost commercial credit. Some people bought cheaper
or fewer items if they were awarded a reduced amount or they went
without if their application had been rejected. A small number
of people applied for more than they needed if they had received
a reduced amount on a previous application. Applicants liked having
the repayments deducted at source as this enabled them to keep
control over their finances, but they were critical of the repayment
levels which were seen as too high both in absolute terms
and compared with other sources of credit.
There is evidence that the Social Fund is currently
unable to meet the demands made on it and this has led to the
current complex rules on the amounts awarded and to the high levels
or repayments. There is a case for increasing the Social Fund
budget so that it can provide more flexible loans where the rules
are more transparent. Until this is possible we can see no case
for extending the scheme to others on low incomes as advocated
in the PAT14 report.
The Personal Finance Research Centre is pleased
to have this opportunity to comment on the Social Fund. Our submission
draws on a wide range of research projects relating to money management
and credit use among households on a low income. The most recent
of these is a study completed for the Department of Social Security
last year which assessed the revised Budgeting Loan scheme and
compared its use with credit unions and the sources of commercial
credit to which people on benefit have access (Whyley, C, Collard,
S and Kempson, E. Saving and borrowing: use of the Social Fund
Budgeting Loan scheme and community credit unions. Corporate
Document Services for the Department of Social Security, 2000).
Our submission relates solely to the Budgeting
Loan scheme and looks at who uses it; what other options they
have for meeting unexpected expenditure; applicants' experiences
of the revised scheme introduced in April 1999, and possible future
development of the scheme.
1. Who uses the Social Fund Budgeting Loan
1.1 There can be little doubt that the Social
Fund Budgeting Loan scheme is a highly valued and important source
of finance for some of the most vulnerable people in the UK. It
is currently only available to people who have been receiving
either Income Support or income-based Jobseekers' Allowance for
at least 26 weeks. There is, moreover, evidence that applicants
to the scheme are drawn from recipients of these two benefits
who are particularly vulnerable (Whyley et al, 2000; Kempson et
al 1994). They have a high incidence of ill-health, of family
instability and breakdown and of insecure housing. Indeed many
of their applications for Budgeting Loans derive from these circumstances.
They also tend to be people who have been receiving benefit for
long periods of time and so have very little or (more usually)
no money in savings that they can draw on to meet unexpected expenditure.
Because of the incidence of family breakdown, many also have no
relations they can turn to when they need to borrow money.
1.2 Despite the recent rule changes, most
applicants to the Budgeting Loan scheme continue to use the money
they borrow for items that would, previously, have been given
a high priority. That is, to replace cookers, fridges, washing
machines, to buy beds or bedding, or to furnish and provide floor
coverings for first homes. Some had sought loans for clothing,
household goods and for decorating materials to make their homes
habitable. They were, therefore, using the money for essentials,
not for discretionary items. Moreover, there was no evidence that
applicants were saying that they needed the loan for one purpose
but spending it on something quite different. This used to be
a common occurrence under the old rules (Huby and Dix, 1992; Kempson
et al, 1994).
1.3 Few were aware before they applied that
loans were no longer dependent on demonstrating a need for essential
items, unless they had already made another application since
the April 1999 rule changes. Applicants became aware that they
could use the loan for a wider range of needs from the wording
of the application form. It is likely, therefore, that this encouraged
them to be honest about the purpose for which they needed to borrow.
2. Access to other forms of credit
2.1 People living on Income Support or Jobseekers'
Allowance have constrained access to other forms of credit. Indeed,
most said that this was why they had applied to the Budgeting
Loan scheme. They would be highly unlikely to pass the credit
checks of mainstream credit companies such as the banks and finance
houses. Some have credit cards that they took out while in work,
but they are most unwilling to use them while on a low income.
They viewed them as a sure route into debt and either cut their
cards up or merely set them aside until they returned to work
(Berthoud and Kempson, 1992; Kempson et al, 1994; Kempson, 1994;
Kempson, 1996; Rowlingson, 1994; Kempson and Whyley, 2000; Whyley
et al, 2000).
2.2 In contrast, there was widespread use
of mail order catalogues and the "alternative" credit
market of companies that target people on low incomesdoor-to-door
money lenders, sometimes known as home-or weekly-collected credit;
rental purchase shops, such as Crazy Georges; sell and buy back
outlets, such as Cash Convertors, and pawnbrokers. Many of these
sources of credit were used to spread the costs of items that
are often bought with Budgeting Loans.
2.3 The alternative market is typified by
the high rates of interest charged and, in some cases, the rather
punitive penalties imposed for late payment. We have calculated
that a washing machine that could be bought in the high street
for £400 using a Budgeting Loan would cost £500 if bought
from a mail order catalogue with repayments spread over 50 weeks.
If it were bought through a rental purchase scheme it would cost
about £600, with a risk of it being repossessed if repayments
were missed at any time during the agreement (in contrast to hire
purchase where goods cannot be repossessed once a third of the
cost has been paid). A 50 week loan for £400 from one of
the weekly-collected credit companies would be the most expensive
option, costing £700.
2.4 There was also fairly widespread evidence
of use of unlicensed lenders, especially by people needing cash
loans in an emergency. Here the interest rates are exorbitant.
A typical short-term loan of £20 over a weekend would involve
a £40 payment on Monday. A larger and longer-term of £400
repaid over six or more months could involve repayments of £2,000.
There was also widespread evidence of benefit books being held
as "collateral" by these lenders and of them meeting
their "customers" outside the post office on benefit
payment day. In three localities we were told that they took three
quarters of the benefit collected as repayment against the loan,
leaving people with just a quarter of their IS or JSA to live
on. In such circumstance people turned to the DSS/BA for a crisis
loan or food vouchers. We were also told of instances of violence
when people were unable to meet the repayments on their loans
to the unlicensed lenders.
2.5 Credit unions are increasingly seen
as an alternative to high cost commercial or unlicensed credit.
As things stand at present, credit unions are unable to meet the
needs of people who use the Social Fund Budgeting Loan scheme.
There are a number of reasons for this.
2.6 First, most people do not have a community
credit union they can join, as there are only around 500 in Britain
with about 110,000 members (Jones, 1999). Following the Credit
Union Taskforce, chaired by Sir Fred Goodwin (HM Treasury, 1999b),
there are a number of proposals that should help the community
credit union network to grow, but this will take time.
2.7 Secondly, the types of people who apply
for Budgeting Loans are unable to save enough money with a credit
union to qualify for loans of the amounts they can get from the
Budgeting Loan scheme or other sources. Often this is because
they are repaying high-cost credit where the interest eats up
any spare money they might otherwise have had. Some credit unions
are beginning to experiment with "debt buy out loans".
This is a welcome move but at present is largely restricted to
people who have fallen into arrears with the loan they want bought
2.8 Some people on IS are active
members of credit unions but they tend to be older, without young
dependent children, and in more stable circumstances than the
people who apply to the Budgeting Loan scheme. They also tend
to have been on benefit for shorter periods of time.
2.9 Thirdly, there is clear evidence that
credit union loans are used by people on low incomes for quite
different purposes to other sources of credit, including Budgeting
Loans. They tend to be seen as an "advance on savings"
and used for discretionary items that others would save up forsuch
as holidays, Christmas, or cosmetic (as opposed to essential)
2.10 Broadly speaking, it is possible to
identify four main reasons why people on IS or income-based JSA
to buy essentials such as household
appliances, furniture or clothing;
and to meet the costs of discretionary
items, such as holidays, Christmas or family events.
2.11 Table 1 shows the purposes for which
different sources of borrowing are used and enables us to see
which ones would be used if people did not have access to Budgeting
Loans from the Social Fund.
2.12 The most common reason for needing
to borrow money was to spread the costs of buying essentials.
This was the main use of the Budgeting Loan scheme, although weekly
collected credit and mail order were also widely used for this
purpose. If they had a local store, some people bought furniture
or white goods on rental purchase.
2.13 Faced with a bill they could not pay,
there was a limited range of sources they could use. Again the
Budgeting Loan scheme was one of them. The others included loans
from weekly collected credit companies, pawning items of value
if they had them, or selling them to a sell-and-buy-back shop
with the option of buying them back within 28 days. In extremis,
they turned to loan sharks.
2.14 People on IS or JSA thought it quite
inappropriate to apply for a Budgeting Loan for discretionary
itemsindeed they were not generally in favour of borrowing
for this purpose at all. Most spent very little holidays or days
out, Christmas presents and family events and these were usually
the first candidates for economies following a drop in income
(Kempson, 1996; Whyley et al, 2000). Discretionary spending was,
however, the main reason why many people borrowed from a credit
union. Others saved up loose change for such expenditure. It seems
unlikely, therefore, that many people will apply to the Social
Fund for this purpose, even though the rules have been relaxed.
Table 1 Purposes for which specific sources of borrowing
||Credit union||Mail order
||Weekly collected credit||Rental purchase
|Loan shark||Family & friends
|Making ends meet||
|Household items, including bedding||x
|Furniture, including beds||x
|Holidays/visits to family||
|Days out/treats for children||
2.15 Nor was the Budgeting Loan scheme seen as an appropriate
source to borrow small sums of money make ends meet until the
next benefit payment daylargely because they needed the
money for short periods of time at short notice. They turned first
of all to family or friends to help them out - usually doing so
on a reciprocal arrangement. Those with no-one they could ask
for small amounts either regularly pawned valuables such as jewellery
or, if they had nothing to pawn, they turned to loan sharks.
Deciding between different sources of credit
2.16 People claiming IS or JSA had a clear hierarchy
of the acceptability of different strategies for raising the money
needed for items that could not be met out of the household budget.
Hierarchy of strategies for raising money.
Savings, credit union loan, friends and family.
Budgeting Loan, mail order.
Weekly collected credit, sell and buy-back shop,
Rental purchase shop, withdrawing credit union
2.17 The most acceptable strategies were drawing on savings,
taking out a loan from a credit union or borrowing from family
or friends. But many people on IS or income-based JSA do not have
these options open to them.
2.18 Borrowing from the Budgeting Loan scheme was, on
the whole, seen as second best along with mail order catalogues,
but for different reasons. In the case of Budgeting Loans people
were reluctant to ask for money from Government, if they had their
own resources or family they could call upon. Mail order, although
liked for its convenience, was acknowledged to be more expensive.
Both sources were liked because there was a routine to the repayment
of loans that took the responsibility out of their hands.
2.19 In the next tier down were weekly collected credit,
sell and buy back shops and pawnbrokers, which were relegated
because of their cost. Rental purchase shops came lower still,
not just because they were high cost, but because of the risk
of the goods being repossessed. It is interesting to note that
drawing on credit union savings was also ranked this low. This
was because such savings were usually seen as providing access
to loans and not for spending.
2.20 Borrowing from an unlicensed lender or "loan
shark" was, without doubt, a last resort, although one often
used when people had no other option.
2.21 When people were weighing up which source of credit
to use, it was clear that they not only took costs and penalties
for late payment into account. They mostly had a clear idea of
the purposes for which each source of credit was appropriate and
they also had a clear idea of their credit limit with most sources.
Hence they might borrow from a mail order catalogue rather than
the credit union because they had "earmarked" their
next credit union loan for some other purpose. They would use
an unlicensed lender or loan shark, when they could not get a
top-up loan from one of the licensed weekly collected credit companies.
3. Experiences of applying to the revised Social Fund Budgeting
3.1 Few people were aware of the changes to the Budgeting
Loan scheme until they were in the process of applying for a loan.
They found the application process straightforward and the new
Budgeting Loan application form was generally considered clear
and simple to complete. They also commented positively on the
speed with which their applications were processed. The main criticisms
related to the amounts they were awarded and to the level of the
repayments. And, despite the fact that the new scheme was designed
to be easier for applicants to understand, hardly anyone understood
how the decisions had been reached, either about the size of their
loan or the level of the repayments.
3.2 The amounts awarded ranged from £40 to £1,000,
although most were between £300 and £500 (official statistics
show that the average Budgeting Loan in 1999-2000 was £389).
Although a small number of successful applicants had received
the full amount they had applied for, most had been awarded less.
Where this had happened they had accepted the reduced amounts
and this was unlikely to deter them from applying again in the
3.3 Faced with a reduced payment some people bought fewer
or cheaper items than they had intended, others borrowed elsewhereoften
from the high cost commercial credit companies described above.
People who had applications turned down either managed without
the item they needed or they borrowed the money elsewhere. Those
who went without often faced inconvenience at best and hardship
at worst as they had needed to replace essentials such as household
white goods. Some were fortunate and could borrow from family;
others did not have this option and borrowed from door-to-door
money lenders or bought the items they needed from a rental purchase
3.4 There was a widespread lack of knowledge of how the
size of the loan offer had been decidedamong both successful
applicants and those who had had applications rejected. In particular,
they were well accustomed to being eligible for a simple top-up
loan from other creditors when they had repaid a set proportion
of their outstanding loan. They expected the same simple rules
to apply to the Social Fund and were quite confused when they
3.5 Of some concern is the fact that people have already
begun inflating the amount of money they apply to the Budgeting
Loan scheme for, in anticipation that they will receive less.
If this practice grows it could potentially lead to additional
3.6 Loan repayments ranged from £3 to £16 a
week. In the small number of cases where people remembered being
given a choice of loan and repayment levels, they had accepted
the higher offer, as they needed the larger sum of money.
3.7 Again levels of knowledge were low. Most people knew
that loans were interest-free and they knew the level of their
repayments. But they did not know how long it would take to repay
the loan and had no idea how the repayment amount had been calculated.
Few knew that the amount could be reviewed although many felt
that the repayment levels were high, compared with other creditors.
Unlike other sources of credit, to reduce the repayment level
on a Budgeting Loan people had to accept a smaller loan. This
is in contrast to other creditors who allow them to extend the
period over which the money is borrowed.
3.8 A small number felt that their repayments left them
with too little to live on, although they mostly managed with
their reduced level of benefit, albeit with a struggle at times.
A change in circumstances, however, made it very difficult for
them to manage.
3.9 In contrast to the level of repayments, the
method of payment, by direct deduction from benefit was
viewed very positively. It enabled people to keep close control
over their money and removed the responsibility for ensuring that
the payments were made.
4.1 We have discussed above the range of factors that
determine which source of credit people on low incomes use: access;
the purpose for which it can be used; the credit limit available;
costs; penalties for late payment; repayment methods and repayment
levels. This is also a useful way of assessing the strengths and
weaknesses of the Social Fund Budgeting Loan scheme from the applicants'
point of view.
4.2 Without doubt, the strengths of the Budgeting Loan
scheme lie its easy access, the fact that it is interest-free
and the automatic deduction of repayments at source, so that there
are no penalties for late payment.
4.3 Compared with most other sources of creditand
especially those that are low costthere is both wide and
fairly easy access to Budgeting Loans for people claiming IS or
income-based JSA. The simpler form and quicker loan decision-making
has undoubtedly improved access. Moreover, applying for a Budgeting
Loan is beginning to be seen as less of a "lottery"
than it was before the changes.
4.4 The Budgeting Loan scheme is the only interest-free
source of credit other than family and friends. It is, therefore,
very popular with potential applicants, who, unless they belong
to a credit union, would have to borrow at very high cost from
the other sources available to them. Without Budgeting Loans,
benefit recipients needing to borrow money would be a good deal
worse off financially.
4.5 Borrowing money when on a very low income is risky.
What most people on low incomes fear above all else is falling
behind with repayments. Budgeting Loans are particularly valued
because the repayments are deducted at source from IS or income-based
4.6 Linked to this, Budgeting Loans are also attractive
because there is no risk of incurring financial penalties for
late paymentunlike credit from mainstream sources and many
of the alternative providers.
4.7 The main weaknesses of the Budgeting Loan stem partly
from applicants' lack of understanding, despite the fact that
the scheme was revised specifically to make it easier to understand.
So applicants do not know in advance what they can apply for,
nor do they understand how their loan awards are decided or the
level of repayments arrived at. In the last two cases, however,
the problem derives from the structure of the scheme and the size
of its budget.
4.8 Since April 1999, Budgeting Loan decisions have been
based on the applicants circumstances and not on the need for
a particular item. As a consequence, applications can now be made
for a much wider range of purposes than was previously the case,
increasing the value of the scheme to people with constrained
access to commercial credit. Use is, however, constrained by poor
knowledge of this change. Applicants only realise that they can
now apply for loans for a wider range of items once they have
taken the decision to make an application. Since knowledge of
the Budgeting Loan scheme, as in most other areas of life, is
acquired by word of mouth, it will take time to disseminate by
this means. Consequently other promotional methods need to be
4.9 Potential applicants lack the information they need
to assess their remaining "credit limit" with the Budgeting
Loan scheme. As a consequence, they find it harder to ration their
use as they do with almost every other source open to themincluding
their family and friends. The result of this is that people apply
but either have their applications turned down or are offered
much less than they applied for.
4.10 Budgeting Loans are the only source of credit where
applicants are quite likely to get less money than they apply
for. Many people who are offered reduced amounts do not really
understand why this is the case. In particular, there is very
poor understanding of the rules on "top-up" loans. The
problem seems to arise because the Budgeting Loan scheme operates
differently from other sources of credit that applicants are familiar
with. Top-up loans from credit unions, weekly collected credit
or a mail order catalogue are discussed in advance of the application.
And most customers, in any case, know their limit and how much
of it is still available to them because it is a much simpler
calculation than the one used for Budgeting Loans.
4.11 In part, this situation could be tackled by better
information. The better solution would be to simplify the rules
on top-up loans so that the Budgeting Loan scheme operates like
other forms of credit. But this would have clear implications
for the Social Fund budget.
4.12 Although interest-free, Budgeting Loan repayment
levels are often considered high especially for smaller loans,
which are usually repaid over shorter periods of time.
4.13 Moreover, applicants can play little part in determining
repayment levels. This is in marked contrast to loans from a credit
union. Mail order and weekly collected credit also allow clients
to determine the repayment level to some degree. But while these
sources adjust the repayment level by spreading the loan over
a longer period, the Budgeting Loan scheme is the only one that
ties lower repayment offer to the size of loan rather than its
term. Like receiving loans that are less than the amount applied
for, this is a concept that people find difficult to understand,
because it does not accord with their experiences of other sources
4.14 In addition, rescheduling of weekly-collected credit
repayments is commonplace, in recognition of the fact that most
of their customers will have the occasional unexpected demands
on their income. In contrast, while rescheduling is possible with
Budgeting Loans, it is much less common.
4.15 Again, applicants need clearer explanations of how
their repayment levels have been calculated. But ideally, the
Budgeting Loan scheme should operate like other forms of credit
and allow loans to be spread over longer periods of time. This
would inevitably mean that the Social Fund budget would need to
5. Future development of the Social Fund Budgeting Loan
5.1 On the whole, then, the recent changes to the Budgeting
Loan scheme have been a big improvement. The key areas causing
problems relate to transparency regarding "credit limits"
and the high levels of repayment of small loans. Both of these
arise from the design of the scheme and its level of funding and
will not, therefore, be so easy to resolve.
5.2 However, should it prove possible to increase the
budget of the Social Fund, there can be little doubt that these
are the main areas for increased spending, rather than extending
the scheme to others on low incomes, as was suggested in the report
of PAT 14 (HM Treasury, 1999a).
5.3 Improving awareness and understanding of its rules
and decision-making process would enable people to make much more
effective use of Budgeting Loans. Communicating the fact that
the scheme is no longer linked to needs for particular items will
be an important starting point. However, unless people have some
way of assessing their own "credit limit" they will
not be able to make fully-informed decisions about when and how
much to apply for. Further, being unable to find out, or judge
for themselves, the likelihood of an application being successful
in securing the full amount they require, will also undermine
5.4 Letting all applicants know in advance how
much they are eligible to receive in Budgeting Loans, and when
they can apply for further loans, would give them the security
they need to plan ahead. It would also reduce administrative costs
if fewer people deliberately increase the amounts they apply for
in the expectation of getting less.
5.5 The other key area in which the Budgeting Loan scheme
could be improved relates to the repayment process. While people
are extremely positive about the method of repayment, they find
the levels too high and the system too inflexible. Given that
repayment levels are set to ensure that loans are repaid as quickly
as possible so that the money is available to other applicants,
it may be difficult to reduce them.
5.6 An alternative might be to simply make the system
more flexible so that, in times of particular financial constraint,
it is easier to miss a payment than at present. This method of
working has proved very successful for weekly collected credit
companies who often set repayments at similar levels.
5.7 Compared with these changes, the case for extending
the Social Fund Budgeting Loan scheme to others on low incomes
is much less compelling. We have changed our minds on this point
since the most recent study for the DSS. People with low wages
may have limited access to mainstream sources of credit,
but they are still likely to be able to borrow money for the types
of essential needs that Budgeting Loans are used for by using
hire purchase or store cards. In contrast recipients of IS or
income-based JSA have very little, if any, access to mainstream
credit and are forced to use high-cost, alternative sources. The
extent of unmet needs for credit that remains among this group
provides a strong argument for concentrating resources among them.
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The Treasury set up eighteen Policy Action Teams (PATs 1-18) over
the past two years following the Social Exclusion Unit's Report
"Bringing Britain Together", published in September
1998. The report produced by PAT14 "Access to Financial
Services" highlighted a range of ways in which it would
be possible to set about the task of reducing financial exclusion. Back