Climbing the credit ladder: short-term loans as a path to long-term credit

Document type
Date of publication
1 November 2014
Poverty Alleviation Welfare Benefits and Financial Inclusion
Social welfare
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In recent years, the payday lending industry has seen significant growth, followed by necessary regulatory reform. However, despite changes in both principles and lending practice, the market in its current form serves neither the interests of consumers nor of wider society.The challenge we now face is that of creating a sustainable short-term credit industry shorn of its negative aspects; one which can protect people from illegal lending at a time when tightened household budgets continue to fuel the demand for credit. This report argues that a reformed short-term credit industry has the potential to be both socially and economically transformative for those in need. It proposes reforms to allow payday customers to ‘climb the credit ladder’ and progress into longer-term finance and the stability and prosperity it can engender. At the same time, the reforms suggested will support those who fall into severe financial difficulty, making sure they do not enter a vicious circle of debt upon debt and are instead pointed towards the advice and resolution they need.

The report calls for a change of approach in the short-term finance market. A well-functioning short-term lending sector should be part of a wider consumer credit market, one which enables people to progress to cheaper and more affordable credit, and provides a safety net to those in need. The report sets out the necessary reforms to the sector to create a market that truly serves those who use it, and which can help create financial stability and prosperity at all levels of our society.

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