Nearly half a million of the lowest income households in Britain have no choice but to resort to expensive higher purchase companies when buying household items , paying up to three times the purchase price because they cannot access affordable credit to buy outright, according to new research.
The new report from think tank the Financial Inclusion Centre (FIC) shows that the sector, dominated by firms such as BrightHouse and Perfect Home, has more than doubled in size since the onset of the economic downturn, profiting off the back of struggling families who have very few options when it comes to spreading the costs of more expensive items. It calls for stricter regulation of the industry to stop some of the worst practices and greater support for fair and affordable alternatives delivered by social lenders, enabling families to save hundreds of pounds by buying up front instead.
Key headlines from the report:
- More than 400,000 households now using Rent-To-Own (RTO) to purchase household goods; an increase of 131% from 210,000 users in 2008.
- There are now 373 RTO stores located in some of the most deprived parts of the country – a figure which has grown by 140% from 155 stores in 2008.
- Over the last 5 years, annual gross profit has risen by 139% to £303 million.
- According to the FCA, approximately half of RTO customers experience some degree of late payment with over 10% of thought to have goods repossessed.
- Range of social alternatives offering customers fair and more affordable options
There are now almost 400 Rent To Own stores nationally, a figure that has grown by over 140% since 2008, offering low income households credit to spread the cost of purchasing consumer goods from furniture and large household items such as cookers and washing machines to electrical items such as TVs and computers. Typical RTO customers are young mothers (often lone parent), living in rented accommodation and almost exclusively from low income households that are wholly or partly reliant on welfare benefits.
Report author Gareth Evans, Director of FIC says “These firms continue to litter the high streets of our most deprived towns and cities, making hundreds of millions of pounds of profits from the growing numbers that don’t have any other options but to pay a poverty premium when borrowing. It’s not just the huge costs, but most customers are also required to take out expensive warranties and insurances that they don’t want or need and worrying numbers struggle to keep up with repayments resulting in the goods being reposed.”
For example, the report shows how the cheapest washing machine at BrightHouse, the prominent Rent to Own firm, could cost as much as £1,056 if someone paid weekly over three years. Yet, a similar model with the same service cover can be found for just £350 on the high street – almost 3 times the price.
Case study – Tina, a parent of 3 children from Southwark, London
“My washing machine broke and I have three children. The first thing I could think of was BrightHouse…. For some people BrightHouse is the only option.” But concerned about the amount it was going to cost her, Tina found a more affordable alternative at her local credit union; “The credit union got back to me to say they could give me the money to buy the machine outright….. They basically saved me at least £1,200.”
Case Study – Mel, a single parent of 3 children with caring responsibilities for her disabled son
“I used BrightHouse before, and their prices are horrendous and they go on forever. A lot of these companies, they hit on the people that do struggle. If you got the cash you can get it a lot cheaper, but these companies put on such high interest that you’re paying it off forever. … And it’s sad because it’s the people who really need it who the companies are making the money off of.
The FIC report comes almost a year on from a highly critical review by an all-party group of MPs’ that highlighted some of the worst practices and with the regulator, the Financial Conduct Authority, set to announce new rules in the next few months, calls are growing for it to curb the worst excesses of the market.
Cash-strapped families need alternatives
Yet, despite the large number of people using these firms, the high costs and the detrimental impact, there is still a distinct lack of alternatives and those that do lack reach and scale to make an impact
Gareth Evans, said “Even with better regulation, we desperately need real alternatives that can compete with the likes of BrightHouse by mirroring some of the features that can meet the needs and expectations of these consumers but without the eye watering prices and the poor practices. Our research shows, there are a host exciting social businesses that have responded to the challenge and are trying to compete with the likes of BrightHouse.”
The report picks out five examples of RTO alternatives from across the country that are being successfully delivered either locally or nationally using very different approaches, showing how a range of local authorities, housing associations and social lenders, (such as credit unions) are working together to tackle the problem. These alternatives are bringing together affordable sources of funding that allows low income households to purchase a range of household goods either high street shops or comprehensive websites.
Case Study 1 – Fair For You (new national online alternative)
One such example is not-for-profit online lender ‘Fair For You’ that launched nationally in January 2016. Customers can browse its website and select the products they wish to purchase before applying online for its small affordable loans. Once the loan has been approved following affordability checks, goods are delivered within 72 hours. It is aimed at low-medium income workers (‘working poor’) who typically have experience with online credit such as payday loans.
For more about Fair For You, read this post from Angela Clements
Example 2 – Furniture 4U (Bolton based alternative with high street shop)
This partnership between Bolton Council, the local housing association, Bolton Homes and social lender, Hoot Credit Union has a high street shop selling a range of essential household items. It co-locates the Furniture4U retail outlet with Hoot Credit Union so that it is a seamless customer service.
Read the full report here, in our knowledge bank.