(But rubbish with economics)

A new report from Barnardos (or Doctor Barnardos, 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 ( 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 Barnardos 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 wont 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, Im not at all surprised that the interest rates look quite high. The alternative is not to have the facility available at all. Barnardos is a charity. Brighthouse is not. A trader has to make a commercial return, to pay collectors, to absorb bad debts.

Barnardos 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 Barnardos 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.

Lets be clear that I applaud the work that Barnardos 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.