Select Committee on Social Security Minutes of Evidence

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 introduced—even 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.[1]


  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 scheme?

  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 incomes—door-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 out.

  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 for—such as holidays, Christmas, or cosmetic (as opposed to essential) decorating.


  2.10  Broadly speaking, it is possible to identify four main reasons why people on IS or income-based JSA borrow money:

    —  to make ends meet;

    —  to pay bills;

    —  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 items—indeed 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 are used

Budgeting Loan Credit unionMail order Weekly collected creditRental purchase Sell and
Loan sharkFamily & friends
Making ends meet x xx
Billsx xx xx
Clothingxx x
Household items, including beddingx xx
White/brown goodsx xxx
Furniture, including bedsx xx x
Decoratingx x
Discretionary spending
Home improvementsx
Xmas/giftsx xx
Holidays/visits to family xx
Days out/treats for children x
Family eventsx
Second-hand carsx x

  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 day—largely 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, pawnbroker.

    —  Rental purchase shop, withdrawing credit union savings.

    —  Loan sharks.

  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 Loan scheme

  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.

Award amounts

  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 future.

  3.3  Faced with a reduced payment some people bought fewer or cheaper items than they had intended, others borrowed elsewhere—often 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 shop.

  3.4  There was a widespread lack of knowledge of how the size of the loan offer had been decided—among 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 did not.

  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 administration costs.


  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 credit—and especially those that are low cost—there 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 JSA.

  4.6  Linked to this, Budgeting Loans are also attractive because there is no risk of incurring financial penalties for late payment—unlike 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 employed.


  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 them—including 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 of credit.

  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 be increased.

5.  Future development of the Social Fund Budgeting Loan scheme

  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 their decision-making.

  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.


  Berthoud, R and Kempson, E (1992) Credit and debt: the PSI report. London: Policy Studies Institute.

  Department of Social Security (1999) The revised Social Fund Budgeting Loan scheme: a description of the scheme. London: DSS Social Fund Policy Branch.

  HM Treasury (1999a) Access to financial services. London: HM Treasury.

  HM Treasury (1999b) Credit unions of the future. HM Treasury website.

  Huby, E and Dix, G (1992) Evaluating the Social Fund. DSS Research Report Number 9. London: HMSO.

  Jones, P (1999) Towards sustainable credit union development. ABCUL.

  Kempson, E (1994) Outside the banking system. London: HMSO.

  Kempson, E, Bryson, A and Rowlingson, K (1994) Hard times? How poor families make ends meet. London: Policy Studies Institute.

  Kempson, E (1996) Life on a low income. Bristol: Policy Press.

  Kempson, E and Whyley, C (2000) Extortionate credit: a review of research for the Department of Trade and Industry. London: Department of Trade and Industry.

  Rowlingson, K (1994) Moneylenders and their customers. London: Policy Studies Institute.

  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.

January 2001

1   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

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