Since the early 1990s the UK has seen a rapid growth in the availability and marketing of consumer credit products, particularly to the lowestrisk, highest-profit customers. In addition, intense competition in the financial services market has made credit available to a relatively wide customer base, including people with poor credit records or a history of bad debt. Consequently, use of credit has increased dramatically and the majority of UK households now have access to, and make use of, mainstream consumer credit facilities such as credit and store cards, unsecured personal loans and hire purchase (Kempson, 2002).

Despite this expansion, access to high street credit is still severely constrained for people on low and insecure incomes. As a consequence, many of them borrow from lenders operating at the lower end of the sub-prime credit market where annual percentage rates (APRs) typically range from 100% to 400% (Rowlingson, 1994; Kempson, 1996; Speak and Graham, 2000; Whyley et al, 2000; Whyley and Brooker, 2004).

The higher cost and less favourable conditions attached to loans from some of these sources can add considerably to the financial problems of people who are already vulnerable. It is estimated, for example, that low-income consumers pay on average around £130 a month in interest payments on consumer credit, equivalent to 11% of their income (National Consumer Council and Policis, 2005). Those with the most restricted access to credit may be forced to borrow from unregulated, illegal moneylenders, where charges can be astronomical and consumer protection is non-existent (Herbert and Kempson, 1996; Speak and Graham, 2000; Whyley et al, 2000).

This chapter examines the provision of credit to people on low incomes from the perspective of both the borrower and the lender. It then goes on to explore the size and nature of the potential market for more affordable credit and considers the options for delivering affordable credit to those who most need it.

The main credit sources available to low-income households

While many people on low incomes have some choice between different types of credit, on the whole their options are restricted to sources that are high cost and have other associated disadvantages. The main attraction of these types of credit is that they are straightforward to access. Most importantly, they do not require credit checks.