A credit union set up to help North East people struggling to access mainstream loans is turning down more than half of applications because struggling families would not have enough money to pay them back.
Joanne Angus, the chief operating officer at NEFirst Credit Union, said demand for low-interest loans to pay for essentials such as food and heating had increased since the start of the cost of living crisis, and she expected this to continue to rise as people were overwhelmed by rising costs.
"Most of the people who come to us can't borrow money from anywhere else as something has gone wrong for them financially in the past, such as a divorce, a bad relationship or domestic abuse," said Joanne. "We are often their last resort, but we are finding that we are having to turn more away.
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"We assess every application individually - we never use automated decision making and never say computer says no - but with underwriting concerns such as people already using buy now pay later or no regular income, we would not be responsible if we added to their problems further down the line.
"We are finding that the people worst hit by the cost of living crisis are those who are working, not those relying entirely on benefits. If your only income is Universal Credit or PIP, that is regular and predictable, but workers who have their wages topped up by Universal Credit really suffer because their benefits payments vary depending on how many weeks there are in a month or how many hours they work. Then there are the people who earn just too much to claim Universal Credit, so they don't get any of the cost of living payments that Universal Credit claimants get and they are really feeling the pinch.
"Since last October, we have approved loans of £1.7m. We approved loans of £1.6m for the whole year prior to that, and £1.4m before that. I have been COO for about four years and in that time demand is increasing and we are seeing a real increase in in-work poverty.
Joanne said that working people are often too proud to ask for help and thought they were failing because they could not make ends meet. "Another factor is that people are generally working through the day, so they can't access the food banks, warm spaces and initiatives such as free haircuts available during the day," she said. "We see NHS nurses, teaching assistants and DWP and local council staff, all who are struggling," she said. "Maybe they saved through lockdown to buy a house, then they are hit by hikes in their mortgages and they just can't manage.
"When we are assessing an applicant for a loan, we use Open Banking, which gives us access to the applicant's bank account so we can assess the full situation," said Joanne. "We find that people relying solely on benefits are actually managing better than a lot of working people. They are even affording holidays and we often see transactions at places such as Amazon or Uber Eats around when cost of living payments have arrived, which a lot of working people can not afford."
But Joanne's experience at NEFirst is considerably brighter than national figures, which show not-for-profit community lenders had to turn down a shocking 93% of loan applications in the last year as they could not be confident that the borrowers could afford the repayments. Lending increased nationally by a third in the same time to a total of £46m to 90,630 people in 2022, according to an impact report by Responsible Finance, the membership body for community finance providers.
Community lenders such as NEFirst, which has branches in Front Street, Stanley, County Durham, and Jackson Street, Gateshead, offer lower interest rates in order to make borrowing affordable. They are social enterprise lenders with the purpose of reaching customers who can't borrow from high street banks rather than profit distribution.
Without access to community lenders, customers may have to turn to loan shark and other exploitative lenders to get credit, which Joanne says is a constant worry, as she has seen cases where people have been paying back a loan yet the amount owed is higher than when they started.
Theodora Hadjimichael, chief executive of Responsible Finance, told This Is Money: "One quarter of UK adults have less than £100 in savings and one in six people have no money put away. Often low-income households don't have access to an arranged overdraft or a credit card, and in the absence of savings this leaves them highly vulnerable to a financial shock.
"A small loan which they can repay over a few months can be their only way to buy a large item like a fridge or pay a one-off cost like a car repair."
Joanne said a lot of loans granted by NEFinance were for white goods, car repairs and increasingly debt consolidation, where customers can restructure their high-interest debt into a single low-interest loan from the credit union, freeing up disposable income to help pay for essential bills.
"We had one dad who worked full time as an NHS mental health nurse and was also the sole carer for his 11-year-old son. He applied for a £1,000 loan to help with repairs to his car which is essential for him to be able to get to work, but his disposable income was too low to pass our checks," Joanne said. "He offered to pick up more shifts to pay for the initial loan application, but we knew that would be detrimental to his caring for his son.
"However, when we looked at his his financial position via our Open Banking platform, we saw that he had recently taken out a relatively high-cost loan (79.9%) for £600 in September to again pay for car repairs and although he had made payments totalling £197.76, he still owed £499.81. By offering him a no-interest loan of £1,500, (£1,00 for the car repairs and £500 to pay off the high-cost loan), it became affordable. His payments became £62.50 per month rather than £91.10.
"We do work with people to try to help them where we can. We offer what we call family loans, which means that Child Benefit is paid to us and the loan repayment is taken out of that before the rest is released to the client, and we also work very hard to get people back on track if they have fallen by the wayside.
"We offer things such as payment holidays,. reduced payments and we have even suspended interest entirely for a few clients as changes in their lives meant there was little chance of them affording to pay it. We do our best to keep people on board, but we do lose some of them.
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"We have around 10,000 members and about 60% of those are borrowers. The other 40% are savers and we offer payroll savings schemes for some local councils and businesses, where money is taken for saving before the wages are paid. We operate very much as a community bank, for the people of the North East. We would much rather people came to use for a loan as it keeps the money in our region."
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