Use of Social Fund Budgeting Loans and Community Credit Unions saving and borrowing
A hard copy of this report summary can be obtained by contacting Paul Noakes [E-Mail: Paul.Noakes@dwp.gsi.gov.uk] or by writing to him at the 'Social Research Division, Department for Work and Pensions Security, 4th Floor, Adelphi, 1-11 John Adam Street, London WC2N 6HT'.
Research Report No. 125
By Claire Whyley, Sharon Collard and Elaine Kempson
Main findings:
Social Fund Budgeting Loans
- Overall respondents’ views of the revised Budgeting Loan scheme were positive and any negative views were largely based on their experiences under the old scheme.
- On the whole the scheme was highly valued by applicants, although their knowledge of how it had changed was only acquired once an application had been made. Consequently they were more aware of the simpler and quicker application process than they were of the rule changes.
- Respondents commented in particular on: the shorter claim form which some found more straight forward than the previous form; the broader categories under which they could apply for a loan; and most respondents noted that the process of claiming seemed faster than before.
- Respondents generally had no understanding of how repayment rates were set and many felt that they were set too high. However, all respondents were managing to pay the set amounts and they felt that repayment by direct deduction of their benefit was a main advantage of Budgeting Loans and helped them to keep up with their repayments.
Budgeting Loan and Credit Union Use
- There was very little evidence of respondents using both the Social Fund and Credit Unions together. Those who applied for Budgeting Loans were distinctly different to Credit Union members, suffering a much higher degree of disadvantage and vulnerability than the Credit Union members. Budgeting Loan applicants were mainly younger, with dependent children and were more likely to be living in unstable circumstances.
- All respondents who had received a Budgeting Loan used the money for essential items, such as beds, bedding, an oven or to pay household bills. Credit Union loans were used for a very different purpose. These loans were used for discretionary spending for Christmas, holidays or day trips. For the few respondents who had used both Budgeting Loans and Credit Union loans, the sources of credit acted like parallel forms of credit fulfilling different roles.
Summary
This research was commissioned by the Department of Social Security to explore the ways that people use the Social Fund Budgeting Loan scheme and community credit unions, and to provide some initial information on claimant’s views of the changes to the Budgeting Loan scheme introduced in April 1999.
Research methods
Depth interviews were conducted with users of the Budgeting Loan scheme and members of community credit unions who were claiming either Income Support (IS) or income-based Jobseeker’s Allowance (JSA). A total of 37 interviews were carried out in five localities:
- 16 Budgeting Loan applicants split across two local office areas – one in London with low application rates and the other in a small Scottish town with high rates – and each of these areas had an active credit union;
- 21 credit union members, split across three credit unions – one in London , one in a city in the North West of England and one in a small town in the Midlands.
The interviews explored individuals’ use, experience and attitudes of each of the schemes. In addition, respondents were asked about their views and experience of using other forms of credit, as well as savings. Five people were currently using both schemes – one person from the Budgeting Loan sample and four of the credit union members.
Following these depth interviews, three focus groups explored how people decide what sources of credit to use for specific types of need. All three groups were held in an area where there was a large and active credit union and also where there was a high level of applications to the Budgeting Loan scheme. A full range of alternative providers was also available locally, including some very active unlicensed moneylenders. The composition of the groups was as follows:
- Group 1: people who had had a Budgeting Loan since April 1999;
- Group 2: community credit union members who were receiving qualifying benefits;
- Group 3: people on qualifying benefits who had not applied for a Budgeting Loan since April 1999 nor were they credit union members.
Background to the study
The Budgeting Loan scheme
The Budgeting Loan scheme was set up in 1988, following a major review of social security provision, to replace single payments that had, previously, been available to claimants of Supplementary Benefit. The “Social Security Act 1998” contained legislative measures designed to simplify Budgeting Loan scheme applications, decision-making and review processes, and to make the scheme less costly to administer. The key changes included:
- separate fact-based decision-making with awards based on factual criteria;
- individual maximum possible loans, determined by the “personal” circumstances of the applicant, defined as the length of time on benefit and family size;
- separate and simpler application forms for each type of Social Fund payment;
- a set of broad categories based on need for “financial assistance” for intermittent expenses rather than a demonstrated need for “specific” “items”;
- no investigation of need, removing intrusive and paternalistic questioning.
The main aim of the changes was to make it easier for potential applicants to understand the circumstances in which they could apply and to make some self-assessment of the likelihood of being successful. The scheme was implemented on 5 April 1999.
In 1999/2000, 1,680,000 applications for Budgeting Loans were received and 1,017,000 awards were made. The average size of Budgeting Loan awards was £389 (Department of Social Security statistics 1999/2000).
Community credit unions
Approximately 659 credit unions were operating in Britain in 1999, around two-thirds of which (447) were community-based schemes (Jones, 1999). Membership of credit unions is defined by a ‘common bond’. So, in the case of community credit unions, membership is restricted to people living or working within a certain locality, or who belong to a church, club or other community organisation in that area. The total membership of community credit unions was 107,647 in 1999 (Jones, 1999).
Community credit unions were set up with two main objectives: to promote saving among people on low incomes and to provide access to low-cost credit. To qualify for a loan members must have saved for at least three months and the size of the loan they can apply for is determined by the amount saved (normally three times their savings). In most credit unions, members can obtain loans up to a maximum of £5,000 in excess of their savings (or share capital).
Views and experiences of the Social Fund Budgeting Loan scheme
On the whole views of the revised Budgeting Loan scheme were positive and any negative views were largely based on their experiences under the old scheme. Most people had applied for a Budgeting Loan because they had limited access to commercial credit. They mainly found out about the scheme through word of mouth and consequently few were aware that the rules of the scheme had changed in April 1999, until they were in the process of applying for a loan. They found the application process straightforward and the new Budgeting Loan application form was generally considered clear and simple to complete. They also commented positively on the speed with which their applications were processed.
Despite the changes to the rules, people continued to apply for loans to buy a broadly similar range of goods as under the old scheme. There was a small but growing awareness that it was no longer necessary to say that the money was needed for the items previously given a high priority. A few people had applied for more money than they had needed, having received less than they had applied for on previous occasions. Although some people were aware that the likelihood of receiving a loan can vary across the financial year, there was no evidence that they had timed their applications accordingly.
The amounts awarded ranged from £40 to £1,000, although most were between £300 and £500 (official statistics show that the average Budgeting Loan in 1999/2000 was £389). Although a small number of successful applicants had received the full amount they had applied for, most had been awarded less. Where this had happened they had accepted the reduced amounts and this was unlikely to deter them from applying again in the future. There was, however, widespread lack of knowledge of how the size of the loan offer had been decided – among both successful applicants and those who had had applications rejected.
Loan repayments ranged from £3 to £16 a week. In the small number of cases where people remembered being given a choice of loan and repayment levels, they had accepted the higher offer, as they needed the larger sum of money. Again levels of knowledge were low. Most people knew that loans were interest-free and the level of their repayments. But they did not know how long it would take to repay the loan and had no idea how the repayment amount had been calculated. Few knew that the amount could be reviewed. A small number felt that their repayments were too high, although they managed with their reduced level of benefit, albeit with a struggle at times. The direct deduction of repayments from benefit, however, was viewed very positively as it enabled them to keep close control over their money.
On the whole, then the Budgeting Loan scheme was highly valued by applicants although their knowledge of how it had changed was poor and only gleaned once an application had been made. Consequently they were more aware of the simpler and quicker application process than they were of the rule changes.
Views and experiences of community credit unions
Views of credit unions were generally very positive among their members. Members had found out about their local credit union in a variety of ways, including credit unions’ promotional activities or local profile, word-of-mouth and from schools or play-schemes attended by their children. Most people were attracted because they liked the linked opportunity to save and borrow. Some, mainly people with young children, had joined primarily to get loans, while a small number of older people had mainly wanted a means of saving.
Most of the people interviewed were very active borrowers and the loans they had taken out usually ranged from £200 to £500. Credit union loans were used for a number of different purposes, but generally covered discretionary rather than essential spending.
On the whole, people’s experiences of taking out credit union loans were good. They found the application process simple and straightforward; staff were helpful and supportive; and they perceived the process to be private and non-intrusive. Further, outcomes were generally quick and predictable, as it was rare for credit unions to refuse a loan application. However, people who had had to appear before a loan committee as part of the application process had found it very unsatisfactory.
Repayment levels ranged from £2 to £25 and were decided by borrowers themselves in discussion with the credit union loan officer. Most set them low, but aimed to pay off more if they could afford to do so. Even so, a few had been unable to maintain their repayments at some time and had found the credit union staff helpful if they had to miss a repayment altogether. Because most of them lacked a bank account, repayments tended to be made in person and in cash.
Comparing the Budgeting Loan scheme and loans from credit unions
There was very little overlap between use of the Budgeting Loan scheme and community credit unions. In part this is because community credit unions are thin on the ground and, where they exist, have fairly small numbers of members. But overlap was low even in areas where there is an active community credit union. To a large extent this was because they were used by different groups of people and for quite different purposes.
On the whole, Budgeting Loan applicants were far more likely than credit union members to be living in circumstances that tend to be associated with hardship and constrained budgets. They included many more families with children (and lone parents in particular) who had lived on benefit for extended periods of time. Unlike the credit union members who were claiming IS or income-based JSA, they included a number of people with health problems, of family breakdown and of recent house moves.
While Budgeting Loans were used for essentials (beds, cookers and washing machines), loans from credit unions were generally spent on discretionary items that other people might well save up for (Christmas, holidays and planned family events). This was the case even among the small number of people who borrowed from both sources.
The rules governing credit union loans are very straightforward compared to other forms of credit, Budgeting Loans included. Consequently, all credit union members knew that their loans were related to the amount they had saved, whereas Budgeting Loan applicants knew far less about the rules of the scheme. This was especially noticeable in relation to ‘top-up’ loans. While most credit union loan applicants had received the full amount they had applied for, most of the Budgeting Loan applicants did not, because they had applied for amounts that were greater than their ‘credit limit’.
Both schemes were considered easy to apply to, even though Budgeting Loan application forms were filled in without assistance and credit union members discussed their application with a loan officer. In both cases applicants thought that their applications had been dealt with speedily. But while credit union members thought that they had a ‘right’ to a loan, Budgeting Loan applicants clearly did not.
Budgeting Loan applicants particularly liked the fact that repayments were deducted at source from their benefit as this removed the responsibility for ensuring that they were made. On the other hand, credit union members did not find that responsibility a problem. There were a number of reasons for this. They knew that future loans would depend on their repayment history; they felt not repaying a loan would be like stealing from a neighbour, and they had established a regular pattern of visits to pay in savings. In addition, they were not facing as much hardship as the Budgeting Loan applicants.
One important difference was that while Budgeting Loan repayment levels were largely determined by Benefits Agency staff, credit union members were able to decide how much they could afford, in discussion with the loan officer. Consequently they tended to set the amounts low, with the intention of paying more if they could.
Other credit use
Most people used some other form of credit alongside the Budgeting Loan scheme or loans from a credit union, although they usually had only one other credit commitment. The most common sources were goods bought on credit from a mail order catalogue and loans from one of the weekly collected credit companies.
Mail order catalogues were used in much the same way by both Budgeting Loan applicants and credit union members. Most customers were women, who bought children’s shoes and clothes, as well as bedding, white goods and other household equipment. Catalogues were also widely used to spread the cost of Christmas presents. There was, therefore, some overlap both with Budgeting Loans and borrowing from a credit union. Two things attracted people to mail order catalogues: the convenience of shopping from home and the opportunity to spread the costs of buying everyday things.
The “alternative credit market” comprises five distinct forms of credit: weekly collected credit, rental purchase outlets (such as Crazy George’s), pawnbrokers, sell and buy-back outlets (such as Cash Convertors), and unlicensed lenders or loan sharks. All five of these had been used by people taking part in the research, although weekly collected credit was by far the most common. On the whole, users of the alternative market were young families with children and, reflecting this, there were more users among Budgeting Loan applicants than there were among credit union members. People borrowed in the alternative market for a range of different purposes. These spanned the range of reasons why people had taken out a Budgeting loan or borrowed from a credit union as well as including cash loans to make ends meet. Several people had borrowed in the secondary market, having applied for a Budgeting Loan and failing to get the money they needed. The main perceived advantage of alternative credit providers was their availability to people on Income Support, while the chief disadvantage was their cost.
Family and friends regularly helped one another out with small sums of money to make ends meet but borrowing larger sums of money was not at all common. In part, this was because many of the people interviewed had no-one who could afford to lend them money; in part because larger-scale borrowing was believed to put a strain on family relationships. Where it occurred, it was young people with children who had borrowed money from their parents or other older relatives. In all cases they had already tried to borrow the money elsewhere but been unsuccessful. The Social Fund was the most common source they had tried.
Access to banking facilities and to mainstream credit – such as bank or building society loans, overdrafts, plastic cards and hire purchase – was very limited indeed. There was little difference in levels of use between Budgeting Loan applicants and credit union members on IS or income-based JSA. Although perceived as low-cost, the mainstream credit was not used for three main reasons: lack of access; fear of getting into financial difficulties, and fear of the penalties and debt recovery practices they would face.
When presented with a hypothetical range of needs that could not be met from the household budget, people had a clear idea of the most appropriate course of action to take. If possible, relatives would be asked for a loan in the event of a family emergency and failing that an application made to the Budgeting Loan scheme. They were unwilling to borrow for a daughter’s wedding, and thought that the daughter herself should save up for the event. To find the last installment on a pre-paid holiday, people would borrow from relatives or cut back on household spending. If they needed more money than could be raised in either of these ways, they would apply for a Budgeting Loan, but say the money was needed for something else. A Budgeting Loan was widely considered the most appropriate source to replace a washing machine, followed by buying it on installments through a mail order catalogue.
Saving
Although most people saved some money regularly, very few of them actively saved in a bank or building society account. If such accounts were used at all, it was to retain small amounts of unspent money for short periods of time – usually until it was needed to make ends meet.
Almost all the 22 credit union members in the study were actively saving at the time of the research, although more than half of them had lapsed at some time since becoming a member. Most of them had never saved regularly before joining the credit union. The sums saved were between £1 and £5 a week although in the majority of cases, the amount varied greatly from one week to the next. The most important influence on the amount saved was whether or not they were repaying a loan, followed by more general aspects of affordability. Some people regularly paid the same amount to the credit union and, sometimes, all of this would go into savings; at other times some or all of it would be used to repay a loan. In contrast to other forms of saving, credit union members on IS of income-based JSA were not saving up to buy something, but as a means of gaining access to loans and to provide them with a safety net in an emergency.
Informal saving was very widespread both among Budgeting Loan applicants and credit union members. It took a variety of forms. Most common, was saving loose change at home and this money was normally earmarked for a particular purpose, such as holidays, birthdays and Christmas. Other methods of saving included: buying savings stamps to save up for telephone bills or a television licence or to buy food and presents at Christmas; Christmas savings clubs; delaying drawing benefits or other income, such as mail order catalogue commission, and giving money to someone else to hold for them.
Conclusions
Most people on IS or income-based JSA “did” have a choice of credit sources, although it was largely limited to ones that are high cost and have many associated disadvantages. The Budgeting Loan scheme was, however, the only source of low-cost credit that was widely available to them. There were four main reasons why people on IS or income-based JSA had needed to borrow money:
- to buy essentials such as household appliances, furniture or clothing;
- to pay bills;
- to meet the costs of discretionary items, such as holidays, Christmas or family events; and
- to make ends meet.
Budgeting Loans were mainly used for the first two of these; credit union loans for the third. As such, the main alternatives to a Budgeting Loan were mail order catalogues and weekly collected credit. Saving was the chief alternative to borrowing from a credit union. Neither Budgeting Loans nor credit union loans were used to make ends meet. This need was met by borrowing from friends and family wherever possible or else by pawning valuables or borrowing from an unlicensed ‘loan shark’.
There was a clear hierarchy of acceptability of the various strategies for raising the money needed for items that could not be met out of the household budget. The most acceptable strategies were drawing on savings, taking out a loan from a credit union or borrowing from family or friends.
At the other extreme, borrowing from a loan shark was, without doubt, a last resort. Borrowing from the Budgeting Loan scheme was, on the whole, seen as second best, largely because there was a reluctance to ask for money from Government, as opposed to drawing on your own resources or those of your family. Interestingly, withdrawing credit union savings was also perceived to be an unacceptable option – mainly because most credit union members on low incomes saw them as security for future loans, rather than money that could be spent.
Putting this together a model was constructed of the decision-making process about raising money for things that cannot be afforded from the household budget.
- First, the options people consider are constrained by access and by their knowledge of the sources to which they have access.
- Secondly, they assess what sources can be used for the particular purpose for which they need the money.
- Thirdly, they assess the ‘credit limit’ they currently have with each appropriate source available and whether or not they might need it for something else.
- Fourthly, they weigh up the relative costs of raising money by each of the options, alongside the penalties for late payment.
- Finally, they consider whether they can afford the level of repayment offered by the creditor and also how the repayments are to be made – with a preference for methods that take some of the responsibility for repaying out of their hands.
Applying this to the Budgeting Loan scheme shows that it is accessible, but people do not currently know either what they can borrow for or the maximum amount that they can borrow. The scheme is interest-free and the method of repayment prevents default and hence avoids penalties. Repayment levels, however, are considered both high and inflexible.
The main shortcoming of credit unions is their very limited availability and the consequent low level of awareness of their existence. Access is further restricted by the requirement that people need to save before they can borrow. On the other hand, members know what they can borrow for and how much they are eligible to borrow. Costs are low and there are few penalties for late payment.
Future development of community credit unions and the Budgeting Loan scheme should not focus on whether or how they can be co-ordinated, but more on what they can learn from each other and how, together they can lessen the need for people on IS or income-based JSA to use high-cost commercial credit. For credit unions this means widening access - either by helping people in these circumstances to save or by offering them loans without the necessity of savings.
For Budgeting Loans it is less a matter of widening access than of making it easier to use. In particular, improving awareness and understanding of its rules and decision-making would enable people to use it more effectively. This includes communicating the fact that the scheme is no longer linked to needs for particular items. Letting all applicants know “in advance” how much they are eligible to borrow, and when they can apply for further loans, would give them the security they need to plan ahead. It would also reduce administrative costs if fewer people deliberately increase the amounts they apply for in the expectation of getting less.
Finally, while people are extremely positive about the method of repayment of Budgeting Loans, they often find the levels too high and the system too inflexible. Given that repayment levels are set to ensure that loans are repaid as quickly as possible so that the money is available to other applicants, it may be difficult to reduce them. An alternative might be to simply make the system more flexible so that, in times of particular financial constraint, it is easier to miss a payment than at present.
Publication details
Whyley, C., Collard, S. and Kempson, E. (November 2000) “Saving and Borrowing: Use of the Social Fund Budgeting Loan and Community Credit Unions ”(DSS Research Report No. 125) Leeds: CDS
Other relevant publications
Elam, G., Lee, S. and Tadd, E. (1999) “Minimal Income Households: Circumstances and Strategies ”(DSS In-house Research Report No. 57) London: DSS
Huby, M. and Dix, G. (1992) “Evaluating the Social Fund ”(DSS Research Report No. 9) London: TSO
Walker, R., Dix, G. and Huby, M. (1992) “Working the Social Fund ”(DSS Research report No. 8) London: TSO