The Bank of England has raised interest rates, and with UK household savings at an all-time low, many employees may turn to payday lenders when in need. Salary-deductible loans offer a much more responsible alternative.
As expected, in August the Bank of England finally pressed the button on an interest rate rise of 0.25%.
The increase – by one quarter of a percentage point from 0.5% to 0.75% – means the rate is now at its highest level in almost a decade.
The Bank had originally been expected to raise rates back in May, but resisted owing to an economic slowdown, exacerbated by severe winter weather conditions.
However, governor Mark Carney is confident that the sluggish growth in the first quarter – in which economic growth ground down to a rate of 0.2% – is now behind the UK, as evidenced by a gradual uptick in household spending of late.
The Bank has forecast ‘modest’ growth for the short-term, with an outlook of 1.4% for 2018. Inflation has been predicted to drop by the Bank’s target of 2% by 2020.
So, what does this mean for savers? In short, it’s complicated.
Since the Bank last topped up interest rates from 0.25% to 0.5% in November, some savers had been given a modicum of hope by Carney’s suggestion that the rise would be passed on to saving accounts, affording better returns.
This is yet to transpire. According to the Financial Conduct Authority (FCA), people are missing out on around £480 million in returns, and might do better by switching deals and providers, as opposed to waiting on banks to increase their rates.
However, there is a glaring factor at play here: the UK’s growing status as a nation of borrowers.
Recent figures from the Office for National Statistics (ONS) revealed that the saving ratio for households out of their disposable income fell to 4.9% in 2017 – the lowest level since records began in 1963. This was further corroborated by findings by the Money Advice Service, which suggests four in ten adults in the UK have less than £500 in savings. More worrying still, a survey by ING bank found 28% had no savings whatsoever in their account.
The implications of this trend are concerning, particularly for households struggling to get by. For every unforeseen charge that families and individuals may incur – from the boiler breaking down to an unexpected bill – there is often the temptation to head for the payday lender. For those most vulnerable with poor credit histories, loan sharks can be a depressing last resort.
Indeed, according to a survey by the FCA last year, millions of Britons would find it difficult to pay an unexpected bill of £50.
For borrowers, the raise in the interest rate – however nominal it might be, comparatively speaking – could push the needle of the financial pressure cooker. As borrowing rates rise, taking out payday loans and credit cards will only become more expensive.
And even those in full-time employment are not immune to the impact of financial shocks.
A recent PwC report concluded that almost one third of employees are more likely to be distracted in the office as a result of personal anxieties over their finances.
This was corroborated in a 2017 report by the Chartered Institute for Personnel and Development (CIPD), which revealed that one in four employees in the UK felt money worries had affected their performance at the coalface.
Even those earning well above the average UK salary – which currently stands at £27,271, according to ONS – are feeling the strain. According to CIPD’s research, earners of between £45,000 and £59,999 said financial struggles had taken hold of their ability to do their job. Around 19% of the survey’s respondents claimed to have suffered from lower energy levels and fatigue during working hours as a result of sleepless nights.
As a result, salary-deductible loans represent the most flexible and practical recourse for those buffeted by these financially-straitened times.
This was posited in a recent report by Harvard’s Mossavar-Rahmani Center for Business and Government, which advocated “employer-sponsored fintech benefits” as a solution, by way of providing employees with poor credit access to “traditional financial products”. Such products range from emergency savings accounts and loans to online and mobile financial management apps.
Salary Finance, a UK-based company, works with employers to offer access to a range of salary-linked products designed to help employees save money and borrow sensibly.
Having already seen a mounting demand for its salary-deductible loans product, the group believes this is set to continue if interest rates stay on the rise. (There is little doubt that this will happen, with Carney, speaking on 2 August, predicting “gradual” and “limited” rate rises to come.)
By working closely with employers, Salary Finance helps create significant cost-savings though lower customer acquisition costs and reduced credit risk – these savings are then passed on to customers, who are able to charge lower interest-rates on loan products. For example, on an average £3100 loan, employees can expect to save £600 in interest payments.
One of Salary Finance’s early partners was Hackney Council, which began offering financial products in December 2016. As a public sector body, its employees had, in the words of head of HR Dan Paul, “been through years of low-inflation pay rises”. Consequently, the East London local authority was keen to “do anything to stretch take-home pay”.
By Paul’s admission, when Salary Finance first visited Hackney Town Hall, there were fears that the products “looked too good to be true, just another bank loan in disguise”. But it soon became apparent that unlike payday loans – in which due diligence is often subsumed by the sheer desperation to get cash as quickly as possible – employees are subjected to affordability checks.
This, however, doesn’t disqualify workers who may have previously taken payday loans. But, as Paul said: “Our end goal is to ensure that our staff never have to access a payday loan.”
Swabra Abdulrehman, a safeguarding and learning assistant at the council, is one such beneficiary of the scheme.
“My finances weren’t sorted out and it just felt like I was in a bit of a hopeless situation,” she said. “It does a lot to you mentally, without you realising it.”
But, after applying for an emergency loan through Salary Finance, “the money was in my account with an hour, and within 3 hours, I’d paid off my overdraft”.
Of all the pay conditions across the public sector, none has lit the touch-paper of debate more than those found across the NHS.
After years of fraught negotiations and campaigns, in March NHS staff were offered a 6.5% pay rise for the next 3 years, having had their wages capped at 1% since 2011 as part of the government’s austerity programme. However, as the pay has not kept up with the rising costs of living felt across the UK, many have slammed the offer as essentially being a cut in real terms.
As reported earlier this year, this has led to increasing numbers of NHS staff applying for payday loans, with interest of up to 1325%. This therefore makes Salary Finance’s recent decision to partner with Wrightington, Wigan and Leigh (WWL) NHS Trust a timely one.
According to the Tust’s director of workforce, Alison Balson, “staff are experiencing financial stress on a continuous basis”, but the partnership with Salary Finance “provides the opportunity for everyone to gain some support”.
“It means that I’m debt free now,” said secretary Cheryl Hogan, who applied for a loan.
“It’s got me out of a situation that I still would have been in today, but for the fact that work are offering it.”
Sarah Crowe, diabetic retinal senior grader, said: “I was in such financial difficulty, I had no money. We just thought that was the way it was and that’s the way it was going be. I could manage it, but it wasn’t a good life to manage debt. I’m back on track.”
While not all members of staff at WWL have been successful in their emergency loan applications so far, admits Balson, “the important thing there is that they have been supported, so they are signposted to information and advice”.
In a fairer world, the likes of NHS staff members would be remunerated appropriately. Instead, they continue to work longer hours – 73% of staff claimed to be working extra hours in a recent NHS staff survey – for pay that, in real-terms, is lower than it was at the start of austerity 7 years ago.
And it’s not just the NHS. Employees up and down the country are struggling to both save and borrow money, in depressing cycles of penury. Responsible lending, via low-interest salary-deductible loans, could make a huge difference amid uncertain economic times.
