CSJ launches investigation into ‘hidden debt’ in Britain
By Mercy Muroki
The buy-now-pay-later (BNPL) market is predicted to grow by almost 400 per cent by 2025. In the last year alone, data shared with the Financial Conduct Authority (FCA) by some of the largest BNPL providers showed that the value of transactions using BNPL schemes had nearly quadrupled.
The ease of using BNPL schemes – which can often be subscribed to by the click of a few buttons during online checkout – has led the FCA to deem them “a really easy way to fall into problem debt”. Applications for BNPL schemes are rarely accompanied by lengthy application forms. Companies exist entirely online unlike traditional lenders, and the schemes are not marketed as ‘loans’.
Clearly, the way consumers borrow money is evolving in Britain, often in ways that are difficult to track and remain either under- or unregulated. The result of this is an increase in ‘hidden debt’.
But BNPL schemes, though receiving considerable attention from politicians and the media, are just the tip of the iceberg when it comes to less visible forms of debt.
Data shows that not only are we borrowing more through BNPL schemes, but that debt falling largely under-the-radar – such as that owed to friends and family, or money borrowed through coercion or illegal lenders – are much more prevalent than often thought.
In 2014 the charity StepChange reported that one in five of its clients experiencing problem debt owed money to friends and family. By 2019, this had risen to over one in three. The Trussell Trust found that 43 per cent of people arriving at their food banks in mid-2020 owed debts to friends and family members; this is as large a proportion as those owing money to private lenders.
Of course, friends and family are a crucial source of support and indeed financial help. But informal borrowing is not without risks; at worst it can have serious consequences, including family breakdown. In one survey of people in financial difficulty, nearly a third of respondents reported that borrowing from family and friends had had a negative impact on their personal relationships.
Between 2020-2021, the Centre for Social Justice held a series of focus groups with hundreds of debt advisers from across the country to learn more about the scale and nature of hidden debt. In a survey of participants, over three quarters believed that people have become more reliant on borrowing from friends and family compared to five years ago.
Many participants also reported that, because of a strong moral obligation often felt by clients who came to them seeking help, debt owed to friends and family was often prioritised over other important formal debts, such as council tax and rent, which could lead to enforcement action or eviction.
And there’s a dark side to hidden debt. 1 in 10 people in a nationally representative survey of the UK say that they have had a partner put debts in their name and they were afraid to say no. In total, there is an estimated £14.4 billion worth of debt in the UK that is directly due to economic abuse.
Despite a crackdown of illegal money lenders in England with the establishment of Illegal Money Lending Teams, the FCA’s verdict on illegal lending is that it remains a “long-standing, often deep rooted” yet “largely hidden practice in many deprived communities in the UK”.
The covert and insidious nature of illegal money lending makes it difficult to get accurate estimates of how widespread it is. We do know that evidence shows loan sharks tend to target deprived communities and victims who are unable to pay illegal lenders face reprisals ranging from physical threats, rape, kidnap, and even murder.
An additional £10.3 billion of debt and arrears is estimated to have been built up solely as result of the pandemic. Yet the reality is that this is not a full reflection of the financial burden facing individuals taking into account the debt hidden from view.
That is why the Centre for Social Justice has launched a new programme of work to uncover the most hidden forms of problem debt and to develop solutions for government and financial institutions to build a more financially inclusive and resilient society.