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Regressive effects of high-cost credit

Geoff Riley

25th March 2017

If you are looking for extra contextual examples of financial market failure then this BBC article will provide grist to the mill.

"With more than 1.7 million people in the UK without a bank account and 40% of the working age population with less than £100 in savings, the Committee asks them to end the scandal of the poorest being excluded from even the most basic financial services." Click here to access the report.

The cap on pay day loan interest rates has squeezed that sector significantly with several companies leaving the market. But it might also have created a void where hard-pressed families in need of credit are nudged (perhaps inadvertently) towards other high cost credit products including charges for unarranged overdrafts and "rent to own" products.

Financial market failures include the regressive effects of high cost credit to higher-risk but vulnerable families. Voluntary credit unions do not seem to be sufficiently scaled to cover the gap in credit demand.

Geoff Riley

Geoff Riley FRSA has been teaching Economics for over thirty years. He has over twenty years experience as Head of Economics at leading schools. He writes extensively and is a contributor and presenter on CPD conferences in the UK and overseas.

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