Over two million people now relying on unsecured lending for essentials
As high inflation continues to place huge financial pressure on families, more are now taking on new unsecured lending to cope, according a major new study from a leading charity.
The Joseph Rowntree Foundation (JRF) found that a fifth of low income families, or 2.3 million people, have been turning to unsecured lending to pay for essentials such as rent and energy bills.
Overall 5.7 million families amongst the poorest 40% in society accumulated around £14.2bn in unsecured debt as of May this year, around £2,500 per family.
More people have been resorting to personal loans, credit cards, overdraft facilities, pay-day lenders and licensed door step loans.
The cost of financing the debt is also escalating, and has reached around £3.9bn or £680 per household on average.
The charity estimates that the cost of financing was £210m less just 18 months ago, before the Bank of England (BoE) began its monetary tightening policy of higher interest rates to combat inflation.
The BoE’s Monetary Policy Committee will make its next decision on interest rates on 3 August, having surprised many with a half point rise in June to take the cost of borrowing to a 15-year high of 5%.
Inflation fell at a faster rate then expected in the year to June to 7.9% from the 8.7% annual figure in May, and the BofE has forecast that prices will fall further in the second half of this year.
Yet even if inflation continues to ease, the charity said that for those who are at the sharpest end of the cost-of-living crisis, there remains a danger than the situation will still worsen.
7.3 million households make sacrifices
The charity also discovered that 7.3 million households are forgoing essentials such as prescription medicine, adequate clothing or even a hot shower.
It was also found that 5.7 million were skipping meals, which could result in social scarring for years to come.
Rachelle Earwaker, a senior economist at JRF said “The cost-of-living crisis is entering a dangerous new phase. Even at this apparent peak in economic suffering, millions of low-income families continue to rely on the lifeline of unsecured lending to prevent them falling even further into severe material hardship.
“But with interest rates continuing to rise, it remains unclear how much more weight this option can bear. Despite inflation falling back, we risk the tragedy of a second wave in this crisis, as millions of people struggle to maintain their borrowing in view of rising interest rates.
“The fragility of the current situation ought to be a preoccupation for policymakers everywhere, but on the contrary, it is in danger of being overlooked. While rising mortgage costs dominate the national conversation, the affordability of short-term credit should also be a factor of vital concern for both Whitehall and Threadneedle Street alike.”