Poor face APRs of up to 1,000% for credit

Low-income families are often paying interest rates in excess of 1,000% APR to gain access to credit, according to a report endorsed by the government.

The study, published yesterday, said "sky-high" interest rates from alternative and unregulated lenders were often the only options available to the financially excluded.

It is proposing training "financial buddies" - local community volunteers - armed with a basic knowledge of financial services and products, who can pass on this information to low-income families in an informal way.

The report, Would You Credit It?, was commissioned by the Co-operative Bank and written by Paul Jones and Tina Barnes of Liverpool John Moores University. It is backed by Citizens Advice and was launched yesterday by Stephen Timms, financial secretary to the Treasury.

The authors said there was evidence of "buyback stores" charging interest rates that topped 1,000% APR. Cash Converters and Cash Generators are two franchises operating buyback services, which involve handing over an item in return for a loan of about a third of its value. The customer retains the right to buy back their goods at a higher price within 28 days.

The report gives the example of a Sussex man who borrowed £150 by providing his £500 stereo as security to a buyback store. The amount had to be repaid within 28 days with an interest charge of £42 - equating to an APR of 1,834%. Door-to-door home credit companies can typically charge APRs in excess of 300% and sometimes as high as 900%.

The report comes as the consumer credit bill continues its journey through parliament. The bill includes proposals to crack down on loan sharks and make it easier for people to challenge unfair credit agreements.

The report called on the government to work with the industry to improve financial education among those on low incomes.