Man going through receipts with a calculator

Feeling the pinch? The dangers of borrowing from friends…

By Dr Lindsey Appleyard, Assistant Professor, Centre for Business in Society and Professor Sally Dibb, Professor Marketing and Society, Centre for Business in Society

Cost-of-living crisis

The UK’s cost of living crisis is the worst in 30 years with prices rising 6.2% in the last year. Households are feeling the pinch on everyday essential items of food, clothes, fuel and energy. Even the Money Saving Expert’s Martin Lewis admitted that he has run out of tricks and tools to help people manage their money and Government intervention is needed. This is especially true for the most vulnerable in society; for example, disabled people that need to use more energy at home and the increasing numbers of people that rely on food banks. Evidence of the extreme hardship being experienced is evident in the way those using food banks are reducing their energy costs by declining certain food items which take too long to cook. However, in Rishi Sunak’s Spring Statement, there is little to protect people on the lowest incomes from rising expenses, with increasing numbers of people being pushed into poverty.

The hidden dangers of seeking credit

Even before this latest crisis, it is perhaps no surprise that 4 million people in the UK were struggling financially and using credit to pay for essentials and make ends meet. Recent research by Stepchange suggests that people in this desperate situation often ask family or friends for help, many of whom may also be experiencing acute financial difficulties.

However, there are hidden dangers of borrowing from family and friends. Research by the Centre for Social Justice on illegal money lending states that people often unknowingly borrow money from loan sharks as they often pose as friends. Illegal lenders victims are often desperate for cash after being declined from another source. The Centre for Social Justice research states that:

  • 80 per cent are declined loans from a legal lender.
  • 44 per cent are declined by a mainstream bank.
  • 27 per cent are declined by a high-cost-short-term credit provider such as a payday lender.

The Centre for Social Justice predicts that the cost-of-living crisis is a ‘perfect storm’ for people to turn to illegal money lenders and predict that the cost of illegal money lending on society is £0.5 billion.  

Community finance lenders are often seen as an alternative solution for accessing credit when mainstream sources such as banks are unable to help. Our latest research, in collaboration with the Swoboda Research Centre and funded by Fair4All, involved working with Credit Unions and Community Development Finance Institutions (CDFIs) to find ways to support people who are at risk of being declined for credit.  The project aims to improve the practices of lenders in managing the declines process, so that vulnerable consumers can be supported towards improved financial wellbeing.  For example, guiding individuals to appropriate sources of help and advice is important, to lessen the risk that they will turn to unaffordable high-cost credit or illegal lenders. However, many more measures are needed to support people in precarious financial situations, including the need for greater state intervention to support most vulnerable.    

How to maximise your income

So what can those on a low income who are struggling with their finances right now do to improve their situation?