Michelle, 48, a single mother of three, was stressed, vulnerable and broke. She had recently moved to a new area in Tyne and Wear after escaping an abusive relationship, and when her working hours were cut back at the beginning of the pandemic, money became tight. “It was soul-destroying,” she says. Desperate, and in need of cash for her son’s birthday, she was delighted when another mother at her child’s school offered to lend her £50. The woman said she knew what it was like to need a little extra and that she could pay her back next month.
That £50 turned into thousands changing hands, in cash, over several months, with no records kept. “She made it her business to know exactly what days money went in my bank,” says Michelle (whose name has been changed). Forced to pay “double bubble” interest, (the amount of the original loan, plus the same again on top), Michelle soon found the debt spiralling out of control and loan sharks pursuing her.
“I got to the point of wanting to end everything,” says Michelle. “I was suicidal and didn’t know who to go to.” The loan shark resorted to intimidation: she was sent threatening messages; people threw things at her house, left unwanted items on her doorstep and smashed the windows at night. Michelle eventually fled with her children, leaving all her possessions behind, and was placed in temporary accommodation just before Christmas last year. After seeking help from England Illegal Money Lending Team (IMLT), she has since been able to turn her life around. Her circumstances are far from unusual: two-thirds of the victims IMLT helped last year thought they were borrowing from a friend.
Michelle is one of about 9 million people who have borrowed more than usual amounts since the start of the pandemic, according to the Office for National Statistics. While not every debtor falls prey to loan sharks, feelings of shame and isolation are widespread among those in severe financial difficulties. Individuals are rarely met with understanding, leading many to blame themselves. But in reality, no one is immune to debt. “I would love to think that the pandemic has made us more understanding, but I don’t think it has,” says Clare Seal, author of Five Steps to Financial Wellbeing. “There’s still a misconception that people are in debt because they are wasting money.”
The Covid-19 pandemic has divided the nation’s wealth like never before. With lockdowns curtailing opportunities to splash out, British households built up their savings to the second-highest level on record at the start of the year. But millions of others have lost jobs or been furloughed, plunging them into debt, while a temporary uplift to universal credit has ended. Since March 2020, more than 11 million people have built up £25bn of arrears and debt to pay for essentials, with a smaller group of households facing severe financial distress.
As Seal points out, the rise in remote working has accelerated this polarisation. “There’s a stark divide between people who were able to work from home – they have saved on travel expenses, maybe moved out to a city that is more affordable, and are now doing hybrid working long-term – and the people who have lost everything.”
“Debt advisers say they have had many first-time callers,” says Laura Whateley, author of Money: A User’s Guide. “Government support has fallen away just as we’re seeing terrifying rises in energy bills, high inflation and no slow down of soaring house prices and rents … We’re only just starting to see the impact.”
Seal says that the pandemic has seen a shift away from the type of credit card borrowing that landed her in £27,000 of debt. People are instead turning to buy-now-pay-later platforms, such as Klarna and Clearpay, and salary-advance schemes, which have soared in popularity over the past year. “A change in the way that people borrow isn’t necessarily bad, but these products are unregulated,” she says.
Moreover, the high interest charged on some of these loans means that, for many, they are a curse instead of salvation. According to Whateley, those with “a bad credit rating are often limited to payday loans or extremely high interest lenders, which can lead you down a path of unmanageable debt”.
Many buy-now-pay-later firms charge no interest, but borrowers unable to meet repayments can find themselves charged late payment fees and pursued by debt collectors.
The number of people looking to borrow from friends and family has risen since the start of the pandemic, from 5.1 million in February 2020 up to 5.9 million in October 2020. In some cases, people have turned to strangers, which has helped to cultivate a cottage industry of lenders looking to make extra cash.
On Reddit, DIY money-lending communities have seen a surge of activity since lockdown began in the UK. These online spaces – most notably the subreddit r/borrow – allow lenders and borrowers to connect with each other directly, and people turn to the forum as an alternative to payday loans. According to data collected on r/borrow by the Consumer Council, the average interest for UK-based requests was 130%, with the average amount borrowed totalling £148. Any registered Reddit user who meets the account criteria can request a peer-to-peer loan by posting on r/borrow, bypassing the need for any kind of credit check.
One user of the subreddit is Ryan Buckley, 30, a stay-at-home dad from West Yorkshire, whose bad credit rating left him with few options during the pandemic. “Having the kids quarantined at home, away from school for more than a year, took its toll on our financial wellbeing,” he says. “We rely on the children having, at minimum, lunch at school. Money just doesn’t stretch as far these days.”
Buckley first turned to the subreddit towards the end of last year for short-term emergency loans – first for £30, and then £100 – over the space of two months. He is now paying back a loan of £200 over two months, which was to help with “general shopping” over the Christmas period.
Borrowers and lenders on the subreddit often share a distrust of traditional banks and lenders, preferring instead the platform’s human element. As Buckley put it: “You’re borrowing from a real person, not a company, somebody who understands situations, lends with compassion and isn’t trying to extort.” Many lenders on the subreddit claim to be motivated by a desire to help people in need, whether it’s providing loans to those looking to top up universal credit or who need help getting by on furlough payments.
Giving out your bank details to someone you don’t know – that’s a terrifying thing to doCatherine Williams
But Reddit can be a minefield, and it is not uncommon for a borrower to vanish before repaying a loan. While r/borrow has a reputation for being relatively well moderated, on other subreddits – such as r/loans and r/simpleloans – scamming is even more rife. Abuses by lenders include asking borrowers for unnecessary information for use in scams, including password information, and access to the borrower’s computer. In some cases, this has led to borrowers being conned out of thousands of pounds. According to the Wales IMLT, which is funded by the Financial Conduct Authority to target illegal money lenders, nearly a third of Reddit’s lenders either had no track record of lending, or were subsequently banned from Reddit due to account violations.
While Reddit has offered to help some, Catherine Williams at IMLT is concerned about how people are borrowing from these online spaces. “Giving out your bank details to someone you don’t know – that’s a terrifying thing to do,” she says. “Even if they are not a loan shark, if you borrow money from an individual, you are not protected.” Although the moderators of the subreddit help to mediate disputes, provide advice and block users who do not adhere to Reddit’s terms of service, ultimately all loans are treated by Reddit as a civil matter.
With regard to the proliferation of money-lending communities on the platform, Reddit says its terms of service “prohibit illegal transactions and we enforce these policies across the platform. We also regularly review subreddits for compliance with our policies. In some instances, we work directly with moderators to ensure users are warned of risks in relevant communities, and many communities impose strict rules and requirements related to user transactions on top of our content policy.”
This form of quick, social-media enabled lending is not limited to Reddit. According to the IMLT, the pandemic has seen an increase in reports of illegal money lenders operating on social media platforms – among them Facebook, Craigslist, and Snapchat.
View image in fullscreenFacebook, Reddit and Snapchat offer quick, social-media enabled lending. Photograph: Matthew Horwood/Alamy
Dating apps have also been used as a platform for illegal lending; Williams describes one case in which a Grindr user shared nude photos with a match, from whom they subsequently borrowed money. The person who lent the money eventually threatened to leak those photos if the borrower refused to keep paying. Likewise, on r/borrow, there have been cases of lenders soliciting nude photos as security to ensure payment.
But there are safer alternatives for people unable to turn to banks or who cannot afford the high interest rates of payday lenders. Credit unions – local organisations where members pool savings to lend to other members – have proved to be a lifeline for many people during the pandemic. There are about 240 credit unions across the UK, with 1.4 million members.
These institutions tend to offer more affordable and lenient repayment terms to those who may struggle to borrow elsewhere. Adam Male, chief executive officer of Kent Savers Credit Union, says that while they “can’t lend to absolutely everyone”, Kent Savers – like many other credit unions – has “a pretty low-bar to entry”. Male says Kent Savers was able to provide support to members unable to repay their loans due to the pandemic. “We’re going to work with the borrower to their advantage, rather than going to a credit department and becoming aggressive.”
This is not to say credit unions are the best option for everyone. “The main downside is that rates can be significantly higher on credit union loans than the loans or credit cards you would get from conventional banks. So usually, it is cheaper to borrow elsewhere,” says Whateley. “But for those who can’t access conventional banks because they don’t have a good credit score, this could be a more affordable option than really high-cost lenders.”
On top of this, credit unions are rarely able to offer the type of emergency, instant loans that can be sourced elsewhere. Their focus, according to Male, is on long-term loans and offering members a “financial education”. This might mean, for example, encouraging members to build a savings habit by depositing a small amount of money each week.
“Credit unions are less in it to make a profit; a lot of the money goes back to the community,” says Seal. But, of course, there is only so much an individual can do when it comes to borrowing. “It’s much easier to look after your financial wellbeing if you have a high-level of privilege. People without privilege and without agency are absolutely reliant on government policy.”
To begin to address the Covid debt crisis, Seal says that the government should immediately reintroduce the universal credit uplift and expedite the regulation of buy now, pay later. “Those two changes – one that should never have happened, and one that has been promised for a long time – would make a huge difference,” she says. Until this takes place, more and more people will fall prey to nefarious money lenders, or end up relying on unregulated corners of the internet to make ends meet.
This article was amended on 21 February 2022 to make it clear that many buy-now-pay-later platforms charge no interest, but borrowers unable to meet repayments can find themselves charged late payment fees and pursued by debt collectors.
