Barnardos: Great with Children

(But rubbish with economics)

A new report from Barnardo’s (or Doctor Barnardo’s, to my generation) deals with the problems created for the poor by high levels of debt.   It deals, inter alia, with the “Rent-to-Own” business, where “Weekly Payment Stores” (http://www.brighthouse.co.uk/) offer goods on credit against a weekly payment.

This report was seized on in rather dramatic terms by the media, the BBC for example headlining the “moral bankruptcy” of the Rent-to-Own business.    There was a quoted example of a washing machine which, paid for in weekly instalments, cost three times the high street price, and this was presented as self-evidently wicked (though anyone with a mortgage who has compared total repayments with the capital sum borrowed may have reached a similar ratio).

I think that Barnardo’s has failed to think through the full implications of what they are saying.  There are two very good reasons why this business model, to be commercially viable at all, must charge very high interest rates.

Firstly, we are dealing here with low-income families where the risk of default is likely to be much higher than for credit business generally.  The interest rate therefore must carry a significant risk premium.

Secondly, the business model involves weekly payments, from low-income homes who may have no bank accounts and won’t be able to support standing orders or direct debits.  Most of these payments will be collected door-to-door (and from clients who may have a propensity to go missing when the tally-man calls).  So there is a very high cost associated with each and every payment.  Clearly this can only be covered through the interest rate charged.

For these reasons, I’m not at all surprised that the interest rates look quite high.  The alternative is not to have the facility available at all.  Barnardo’s is a charity.  Brighthouse is not.  A trader has to make a commercial return, to pay collectors, to absorb bad debts.

Barnardo’s is calling for low or zero-interest loans to be available to low-income families.  But provided by whom?  We recall that the recent economic troubles started with the widespread availability of relatively low-cost loans to people who had a very high likelihood of default.  Do we want to go there again?

Of course the only realistic source of possible large-scale low or zero-interest loans for low-income families is the government.  But the level of welfare made available by the government is a far broader issue than the low-interest provision of a washing machine.  So is Barnardo’s asking for more tax-payers’ money for welfare?  Or for a reallocation of funds within existing welfare budgets?  General calls for compassion are not enough, unless we are prepared to make hard choices in these hard times about where the funding is to come from.

Let’s be clear that I applaud the work that Barnardo’s does.  I am delighted if they, as a charity, are able to make low-interest-rate loans, or grants, available to the needy on a non-commercial basis.  Equally they are welcome to lobby government about the extent and allocation of welfare funding.  But I think they have to be more realistic about commercial lenders.  Either these must charge a commercial rate, or they will cease to offer credit facilities at all.

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8 Responses to Barnardos: Great with Children

  1. Maureen Gannon says:

    My goodness me , didn’t know tally men still existed. Deja Vu moment then, when as a child having to answer the street door to people and say “Sorry my Mums not in”, this was directly after WW2, Dad not yet demobbed, there were no benefit system then , I thought that people were able to apply in today’s world for things like white goods and beds, and do they not get adequate benefits to live on. the family allowance alone sounds pretty good to me, there will always be Mumpers, even more so today than then when there was real hardship. there is enough of the “I want it all and someone else can pay society” Edwina Curry did a good programme recently on this very subject. I do believe that we should now instigate a policy of teaching the 4 R’s reading, riting, rithmatic and RESPONSIBILITY.

  2. Techno says:

    Or you could just cut taxes.

    Employers would be more likely to create jobs, and the workers could take home more of their pay.

    But that would entail making the state smaller and cheaper and that would never do for the likes of Barnardo’s…

  3. Mike says:

    I am constantly impressed by the sheer efficiency of our local Church. It runs on a staff of about four people, most of them unpaid. If we need any money, and usually we don’t, we raise it ourselves. If there is any needy person, we spot them straight away, but we are very alive to bludgers. We actually don’t have that many.
    It is only when we brush up against the State that inefficiencies creep in.

    Barnardos started off, I believe, as a Church thing. Now it is a vast international lobby with, I believe, a huge government support both from the EU and from London.

    So what can you expect?.

  4. Ian says:

    Barnardos’ proposed cheap/free loan scheme sounds a bit like the ECB’s new cheap loan scheme for the PIIGS countries. He who pays the piper – the EU, in Barnardos’ case – calls the tune. This is Brussels propaganda against Cameron and his Anglo-Saxon financial institutions.

    Incidentally Roger, I don’t think your praise of Barnardos’ other work is completely merited. Thousands of children were stolen from their parents by this organisation and sent to Canada as farm slaves, just as workhouse overseers often supplied young “pauper apprentices” to the cotton barons in return for a consideration.

    Finally, who would support a charity whose administrative and campaigning costs were so high as to require an EU subsidy? A charity that had little left over to spend on its supposed beneficiaries (eg cheap/free loans)? If I were in charge of the Charity Commission I would de-register such charities immediately.

  5. Jan M says:

    Roger, people on benefits can apply for a social loan from W&P. It’s interest free and they pay back what W&P think they can afford. I think it’s up to a £1000, and they can have up to a year to repay, so I can’t see why they go to these places and pay well over the odds.

    I like the new format as well, very well set out.

    Also glad to see your not stepping down just yet.

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