The UK credit market has undergone profound changes over the past decade, and not all of them have been positive for people who need to borrow money. Whilst regulatory reforms have introduced important consumer protections following the financial crisis, they have also had an unintended consequence: making it increasingly difficult for people on lower incomes to access legitimate credit when they need it. Recent research from Fair4All Finance paints a concerning picture of what happens when mainstream lending options become too restrictive, revealing that more than three million people have potentially used an unlicensed lender or loan shark in the past three years alone. Even more strikingly, over 10 million people reported borrowing from friends or family in the previous 12 months, suggesting a widespread struggle to access formal credit channels when financial emergencies arise.
The statistics emerging from Fair4All Finance’s quantitative research tell a troubling story about financial exclusion in modern Britain. In weighted surveys conducted across Great Britain in 2023, 7 per cent of respondents said they or someone in their household has used an illegal lender. Perhaps most revealing is the connection between mainstream credit rejection and illegal lending: 16 per cent of those who were declined for regulated credit had either used a loan shark themselves or knew someone in their household who had, compared to just 5 per cent of people who had successfully applied for mainstream credit. This disparity suggests that when legitimate doors close, people facing financial pressure often feel they have nowhere else to turn, making them vulnerable to predatory lenders who operate outside the law and without the protections that regulated financial services must provide.
UNDERSTANDING THE CREDIT VACUUM
The concept of a “credit vacuum” describes what happens when the gap between people who need credit and people who can access it grows too large. For many lower income households, the ability to borrow occasionally has become essential for managing unexpected expenses, smoothing out irregular income patterns, or dealing with emergencies that arise without warning. A broken boiler, a car repair needed to get to work, or an unexpected bill can create genuine financial hardship for households without savings buffers. The need for this kind of occasional borrowing hasn’t diminished, yet the options available through legitimate channels have contracted significantly. When you cannot access loans for bad credit through regulated providers who follow responsible lending practices, the alternatives become increasingly unappealing and potentially dangerous.
The Fair4All Finance report builds on earlier qualitative research published in their “As One Door Closes” report, which highlighted the dangers of this growing credit vacuum for people in financially vulnerable circumstances. What emerges from both pieces of research is a pattern where well-intentioned consumer protection measures, whilst valuable in preventing exploitation, have also inadvertently created barriers that push people towards unregulated or illegal sources of credit. The challenge facing policymakers and the financial services industry is finding the right balance between protecting consumers from predatory lending practices and ensuring they still have access to credit when they genuinely need it. As Fair4All Finance notes in their conclusions, it is difficult to escape the conclusion that the UK credit market is simply not functioning properly for people in lower income households, and the shape of the market has become as important as its overall size.
The migration towards borrowing from friends and family, whilst often preferable to using illegal lenders, brings its own complications and risks. These informal arrangements lack the legal protections and clear terms that come with regulated credit products, potentially creating tension in personal relationships and leaving both parties without recourse if things go wrong. More concerning still is the pathway that can develop from informal borrowing to illegal lending when friends and family either cannot or will no longer provide assistance. Loan sharks often target people who have exhausted other options, using high-pressure tactics, excessive interest rates, and sometimes intimidation or violence to extract payment. Unlike regulated lenders who must adhere to strict conduct rules and affordability assessments, illegal lenders operate without oversight, making them particularly dangerous for vulnerable people who may already be struggling financially.
WHAT NEEDS TO CHANGE
Fair4All Finance’s research doesn’t simply identify problems but also proposes tangible solutions that could help address the credit vacuum and reduce reliance on illegal lending. Their recommendations span multiple areas, from increasing investment in community finance providers to adjusting regulations to better balance consumer protection with access to credit. One key area they highlight is the need for greater capitalisation of community finance organisations, something that was called for in the Woolard Review back in 2021 but remains urgently needed today. Scaling up affordable credit provision requires significant investment not just in loan capital but also in technology, marketing, and product development to reach the people who need these services most.
The regulatory environment also needs careful reconsideration according to the research findings. Whilst nobody is suggesting weakening consumer protections, there’s a recognition that regulations must enable appropriate small sum lending whilst maintaining safeguards. This includes developing a broader definition of what constitutes good consumer outcomes, one that encompasses access to credit alongside consumer protection and affordability considerations. There’s also ongoing debate about whether the Annual Percentage Rate (APR) is always the most appropriate measure for defining value, particularly for small short-term loans where the mathematical calculation can produce eye-watering figures that don’t necessarily reflect the actual cost to the borrower. These regulatory adjustments need to be made thoughtfully, ensuring that any changes genuinely serve consumers rather than simply making it easier for less scrupulous lenders to operate.
Perhaps most intriguingly, Fair4All Finance suggests there’s potential for mainstream providers to do more in serving customers on lower incomes, including examining initiatives like the small dollar loans programmes operating in the United States to assess what might be replicable in the UK context. This acknowledgement that mainstream banks and established lenders have a role to play in addressing the credit vacuum represents an important perspective. For years, the gap left by stricter regulations and reduced high-cost credit provision has largely been left to specialist lenders, community finance providers, and credit unions to fill. Encouraging mainstream institutions to develop appropriate products for customers with imperfect credit histories could significantly expand access whilst maintaining the consumer protections that larger, regulated institutions must adhere to.
Equally crucial to widening access to legitimate credit is developing a preventative approach to illegal lending growth. Fair4All Finance calls for a decisive, coordinated strategy led by the National Illegal Money Lending Teams across the nation, supported by HM Treasury and specifically incorporating illegal digital providers and the associated financial and data harms that come with them. The digital dimension of illegal lending represents a particular concern, as online loan sharks can operate with relative anonymity whilst potentially harvesting personal data and financial information that enables wider fraud and cybercrime. The research recommends expanding the remit of Illegal Money Lending Teams to specifically reference digital illegal lending, with increased resources to develop the necessary skills and tools to tackle this evolving threat. This preventative approach recognises that reducing illegal lending isn’t just about enforcement but also about ensuring people have legitimate alternatives when they need to borrow.
The evidence from Fair4All Finance’s research makes clear that the current state of the UK credit market represents a significant challenge for financial inclusion and consumer wellbeing. When millions of people cannot access mainstream credit for legitimate needs, they will inevitably seek alternatives, whether that means borrowing from friends and family or, more worryingly, turning to illegal lenders who exploit their vulnerability. The solution requires coordinated action across multiple fronts: increasing investment in responsible lending providers, adjusting regulations to better balance protection with access, encouraging mainstream lenders to serve a broader range of customers, and taking decisive action against illegal lending operations. Only by addressing all these elements can the credit market begin to function properly for everyone who needs it, ensuring that financial difficulties don’t push people towards dangerous and exploitative alternatives that can trap them in cycles of debt and harm.
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