The shrinking credit market is turning 200,000 British into easy targets for predatory loan sharks, which grant illegal unsecured lending at extremely high rates of interests, a new report has warned.
A combination of the reduction in sub-prime lending, often known as "door-step lending," and the economic downturn may prompt more people to resort to illegal money lenders, said the report published on Monday by an independent think tank, the New Local Government Network (NLGN).
"There is evidence that the pernicious trend of illegal unsecured lending at extremely high rates of interest, or 'loan sharking,' is making a comeback," said Chris Leslie, co-author of the report.
"The diminished availability of regulated sub-prime credit is creating conditions where a sizable number of people have little option but to borrow from illegal sources," Leslie added.
Loan sharks are unlicensed money lenders, who operate illegally and are not regulated by the financial industry. They are prepared to lend to the financially vulnerable, but charge astronomical interest; and the borrowers are not protected by any form of contract or terms and conditions.
"At least 165,000 people already use loan sharks in the UK and we can expect the number to rise sharply," the report said.
An additional 35,000 people, or an even higher number, are likely to use loan sharks during the recession, it predicted.
CREDIT DRYING UP
The scaling back of sub-prime lending, caused by credit crunch, has left an estimated additional 600,000 to 850,000 people without access to a line of "non-standard" or "sub-prime consumer credit" in the coming year, said the report by the NLGN.
Nationally, there is an estimated demand for small-scale affordable credit of around 1.2 billion pounds (about 1.91 billion U.S. dollars) per year, but their demand is not being met by the established credit providers, said the Treasury's Financial Inclusion Taskforce working group.
The gross mortgage lending declined to an estimated 10.4 billion pounds (16.5 billion dollars) in April, down 9 percent from a month ago, and 60 percent from April 2008, according to new data from the Council of Mortgage Lenders (CML).
CML Director General Michael Coogan said, "It's still too early to spot a clear pattern of recovery in the housing market as some commentators have suggested."
"Activity remains weak, and we have said we will see volatility in monthly lending figures as we bounce along at the bottom of the market. Our forecast for gross lending of 145 billion pounds (211 billion U.S. dollars) in 2009 remains unchanged," Michael added.
LOCAL EFFORTS URGED
The NLGN has been urging local authorities to put additional resources into local credit unions and even to use new Council Banks to offer affordable credit to people who can not access high-street loans.
The number of loan refusals by government's emergency Social Fund has reportedly risen from 316,000 in 2005 to 596,000 in 2008.
Local councils are also urged to step in to protect vulnerable people by mapping predatory lending, promoting financial literacy and public awareness, and enhancing enforcement against illegal lending.
"Local government has historically been at the forefront of new service provision where community needs exist and have the advantage of proximity to their front line and prime local knowledge," said Leslie.
"Further intervention from local government is a crucial next step and we look forward to strong leadership from the sector at a time of great urgency," he added.