As a growing number of people are discovering, once you’re in debt it can be hard to extricate yourself. And often it is hardest for those who are deepest in poverty in the first place. With no access to normal finances, they are more likely to fall prey to loan sharks lending at huge rates of interest, and less able to break free.
That was the starting point for an innovative lending project that has been running in Glasgow for the past 18 months. Scotcash, a social enterprise backed by Glasgow city council together with the city’s housing association and the Royal Bank of Scotland, offers the financially excluded not just loans at affordable rates but also access to bank accounts, financial advice and even discounted house hold goods.
Such has been the extraordinary success of the project that it was last night named overall winner of the Guardian public services awards 2008.
The judges felt it was an outstanding example of public agencies’ capacity to innovate and intervene in a timely and hugely effective way at the hard edge of social policy. Speaking at the awards ceremony in London, broadcaster and journalist Kirsty Wark, who hosted the event, said: ‘This is a local authority thinking outside the box, in partnership with other agencies, and making a real impact on the needs of their local community.’
Financial exclusion continues to be a real problem in the UK, despite the growth of credit unions and government encouragement of the banking sector to tailor products and services to the needs of low-income households. In Glasgow, Sharon MacPherson, the council’s debt strategy officer, says many people are currently forced to use doorstep lenders, often at eye-watering rates of interest topping 160% APR.
In Drumchapel, one of the most deprived areas, a third of households have used expensive forms of credit — a figure which rises to 62% of lone-parent households. And this can all too easily become a downward spiral, says MacPherson.
‘Before you even get to the end of the existing loan you’re being encouraged to take out another loan. It can become never-ending.’
Scotcash set out to rectify this. Initially the idea was simply to offer affordable loans to those in poverty. But it soon became apparent that this was only part of the problem. A significant proportion of customers were not only in debt, they had no bank account or savings either — and this put them even further beyond the pale.
As a result the council teamed up with a wide range of public and private partners to provide a one-stop shop offering a variety of services under one roof. The team consists of three loan advisers and two money advisers as well as a manager and administrator. Among them they can not only arrange low-interest loans and set up bank and savings accounts but also give advice on budgeting and rescheduling debt for those for whom another loan would be inappropriate.
The service, which is open to anyone without financial means, has proved hugely popular. It has received more than 4,500 inquiries, with 1,500 people being granted new loans worth a total of £819,000. In addition, 319 people have opened basic bank accounts and 140 savings accounts.
MacPherson says that they have saved their clients £300,000 in interest payments compared to the cost of their usual loan arrangements. They have also managed to reschedule £2m in outstanding debts and prevent around 80 evictions.
Perhaps as remarkable is the fact that the average debt customers run up is only £500. ‘That may seem small beer compared to those in the financial mainstream,’ says MacPherson. ‘But for those who are financially excluded, who may be on very, very low income and not a lot of assets, that amount of debt can be crippling.’
A large proportion of Scotcash’s customers are single parents, and many are out of work. For them this has been a godsend. As one woman put it: ‘When read about Scotcash, my initial reaction was: ‘That’s too good to be true — who is going to lend with a decent rate of interest to someone like me?”
An example taken from the Scotcash annual report is that of Andrina, a single mother. She had become ensnared in an ever-increasing spiral of debt by the time she came to Scotcash last year.
Unemployed and without access to mainstream banking services, she felt she had no choice but to resort to local doorstep lenders when she got into debt. Not surprisingly, this made things worse.
‘I was gullible, so I said yes,’ she says. ‘Soon I lost control of what I was borrowing and began receiving letters threatening court action.’ It was at this point that she sought help from Scotcash. The service has been able to offer her a range of financial advice as well as the possibility of reasonably priced loans — she is charged just £24.72 interest over 32 weeks on a £200 loan compared to an extra £120 from a doorstep lender.
For Andrina it has been an eye-opener. ‘I now understand about savings and budgets and I can explain to my friends and family how it all works. Once you understand, you’d never go back to doorstep lenders,’ she says. Another customer, encouraged to put £2 a month aside on top of her debt repayments, said this would be the first Christmas she wouldn’t have to take out a loan to buy presents. ‘People find being able to save some money very mpowering,’ observes MacPherson.
The numbers accessing the service continue to grow, but this is not the result of any sophisticated marketing campaign. In fact, the main way of spreading the message has, very deliberately, been through word of mouth.
This is partly because it was essential that Scotcash was seen to be trusted, says MacPherson, and the best way of establishing its credentials was through the recommendation of someone already using the service. It’s also because most of the people they are trying to reach are clustered in certain parts of the city, so word of mouth is often the most effective method of dissemination. ‘We certainly don’t feel there are many gaps in terms of the people who are accessing the service,’ she says.
The service relies on external funding from the Scottish government, Glasgow city council, Glasgow Housing Association and Communities Scotland, the regeneration agency, but aims to be self-sustaining within four years. And over the next 20 years it anticipates it will save clients more than £29m in interest charges.
It has already attracted considerable interest from other local authorities in Scotland as well as a housing association in Wales, and it is hoped that the service will be rolled out to other parts of the country in the near future.
‘Certainly this isn’t a problem that’s unique to Glasgow,’ says MacPherson. She believes the secret of the service’s success is that it gives customers a choice and a sense of empowerment. ‘They feel they’re not stuck in that cycle of always going to a doorstep lender when they’re in financial difficulties — there’s some way out,’ says MacPherson.
‘When you’re in a situation of having to pay back a big loan, it can seem a very dead-end street. This gives people choice and makes them feel they’re part of society, giving them access to the things we take for granted.’
Innovation and progress, customer service award
Sponsor Institute of Customer Service
Glasgow city council, development and regeneration services for Scotcash, a scheme offering Glasgow residents alternatives to high-cost doorstep credit lenders
Legal Services Commission for its Legal Advice Telephone Service, which is popular with ethnic minorities and disabled people Ministry of Justice for its
Small Claims Mediation Service, a fast, free alternative to going to court