For low-income families, or those who have a poor credit report, it is difficult to find lenders who will provide an unsecured loan without a punitive rate of interest. Many in desperation turn to doorstep loan providers or loan sharks. The Government is trying to make it easier for these people to obtain credit by reforming credit unions.
Until now, it has not been possible for credit unions – which are financial co-operatives owned and controlled by members – to offer interest on savings. The government wants to change that, with proposals due to come into effect from next October, making the credit unions able to compete with banks and building societies. This could be a lifeline for communities in poor income areas or for those who have few assets or a poor credit report.
The chief executive of Southwark Credit Union, Lakshman Chandrasekera, has this to say about the benefits of the credit union. 'Increasingly, banks are unwilling to do business with unprofitable customers. A person on benefits might not generate any income for banks and will find it hard to get a current account. Consequently, many people simply withdraw their benefits in cash and spend the money. For a charge of 95p per week to cover our costs, we give members a current account and a debit card, which allows them greater choice and control of how they spend their money.'
The problems experienced by the poorer end of society when it comes to obtaining credit seems to be increasing, with many more now being refused loans. Many experts fear that a mortgage divide is opening up between high and low risk borrowers. For those who have a large deposit or large stake in their house, interest rates are lower and they are being welcomed with open arms. Those borrowers who want to borrow all or most of the asking price, however, are being refused mortgages or face a much higher premium. The current situation where house prices continue to fall makes these borrowers a much higher risk. Those who wish to re-mortgage are in a similar position.
Meanwhile, a row has broken out between Gordon Brown and his Chancellor, Alistair Darling, over a £40bn plan to allow State mortgages. The Prime Minister wants the treasury to underwrite new mortgages to help homeowners in danger of defaulting on their loans. He has suggested that the Government finance this new mortgage scheme by issuing 30 year gilts which would need to be re-financed every two or three years. Such a scheme, he thinks, could prevent families from losing their homes, would give a much-needed boost to the property market and transform the current housing crisis.
The plan is opposed by the Treasury and by Alistair Darling. One Treasury insider said, 'This plan is financial insanity and would seriously threaten the country's long-term future. It is so complicated, basically all smoke and mirrors, that almost no one really understands it. But Mr Brown is adamant this is what he wants. He thinks it's the big bang the Government need to relaunch.' He added, 'You wouldn't run a bookies the way these people are trying to run the country. Marketing gimmicks are being put ahead of sound economic sense.'
As the row continues, another of the Government changes in policy will be apparent this month as basic rate taxpayers find an extra £60 in their pay packets. This is a result of Mr Brown's solution to avert the row that broke out over the removal of the ten percent tax band earlier this year. In a hasty attempt to appease his own party he increased the personal tax allowances, which means an extra £60 this month in pay packets with another £10 a month to the end of the financial year.
Tax adviser Chris Jones from tax advice company Lexis Nexis thinks this could be good news for the economy. 'Taxpayers with another £60 in their pockets may well go and spend it. That could increase high street profits.' Mr Brown will certainly be hoping so.