Three million people have turned to loan sharks amid the cost of living crisis

As many as three million people have turned to an illegal lender in the past three years, raising concerns that more families could be at risk as the cost-of-living crisis continues.

About 7 percent of 18 to 75-year-olds surveyed by polling firm Ipsos said they or someone in their household had borrowed from an unlicensed or unauthorized informal lender who charges interest — known as a loan shark.

Research by the non-profit organization Fair4All Finance has also found that illicit lenders appear to have moved into the upmarket segment, targeting lower-income workers with an average client income of £20,000 – £24,999.

This group is better off than the poorest fifth of the population and may not have considered this option until recently, but has become more vulnerable due to rising costs.

Sacha Romanovitch, CEO of Fair4All Finance said: ‘Our research suggests that illegal lenders are thriving in the credit vacuum created by the departure of expensive but regulated lenders. The unintended consequence is that millions of people who can afford to pay back a fair loan have less safe options.

“There is a growing consensus that structural change is needed to create a credit market that serves everyone.”

Despite some improvements, consumer inflation has remained stubbornly high and stood at 8.7 percent in May. In addition, supermarkets say food inflation has fallen for the second month in a row, but remains at 14.6 percent.

A separate study found that one in four people say the struggle to afford to put food on the table causes real stress and has worsened their mental health.

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While regulated lenders are required to check the affordability of loan applications, illegal lenders will often offer loans to those who cannot afford to pay back because the interest will make them more money in the long run.

“Your amount of money returned is astronomical, you know. The longer they couldn’t pay you back, the better,” an illegal loan provider told investigators.

Charity the Joseph Rowntree Foundation recently reported that 2.8 million low-income households had declined a loan application between May 2021 and May 2023, highlighting the lack of “safe” credit options for lower-income households.

Data from Citizens Advice shows a similar trend. Between January and April this year, the charity helped a record number of people with referrals to food banks or emergency relief funds.

One option for people who have trouble borrowing money legally is a credit union.

These are financial cooperatives that provide savings, loans and all kinds of other services to their members. To join, credit unions usually require members to be part of a common bond, such as living in a designated area or working for a particular employer.

These organizations are often able to lend money to customers on more favorable terms than other major lenders, and have arrangements in place to help more vulnerable borrowers who have difficulty accessing credit elsewhere.

Lauren Peel, director of consumer insights at Fair4All Finance said: ‘When it comes to credit and other financial services, you may feel like you don’t have many good options at the moment, but Community Finance providers are here to help.

“Responsible finance firms and credit unions will always check that a loan is affordable and may be able to help, even if you have been rejected by other providers.

Social lenders and credit unions have been around for decades, helping many people avoid expensive lenders and illegal lenders and build savings.

“While millions of people trust them for financial help, to borrow and save, many people don’t know them.

“Having access to credit during difficult financial times is part of your financial resilience and simply knowing your likely options if you need financial assistance can be a huge relief to people.”

Credit unions and responsible financiers can be found at Find your credit unionAnd Find finance.