Low-paid workers may be paying more than 1,000% interest when they borrow money, a Co-operative Bank report says.

Doorstep lenders and pawnbrokers charge high rates of interest, while other people borrow through "Buyback Stores", the report said. This involves "selling" an item for about one third of its value, and then buying it back at a higher price. In one example, a £500 stereo was sold for a £150 loan and bought back for £192, equal to 1,834% interest. Doorstep lenders typically provide small, short-term, unsecured loans and charge interest at rates of up to 900%. Borrowing money through a pawnbroker will incur interest charges of about 70%.

Forced to borrow

Many people are forced to borrow from such lenders, because they are denied access to mainstream banks or credit firms. About 7.9 million people are estimated to be excluded from mainstream lending, a previous Datamonitor report said. The problem is exacerbated by poor financial knowledge and lack of understanding about the cost of borrowing, the Co-operative Bank report said. Paul Jones of Liverpool's John Moores University carried out the research for the Co-operative Bank. "Our research shows that many people on low incomes rely on word-of-mouth advice from family and friends, which can be inaccurate," said Mr Jones. Mr Jones called for more financial literacy training to prevent low-income consumers from suffering the financial and emotional consequences of extortionate credit. Financial Secretary Stephen Timms welcomed the research and said the government was committed to tackling financial and social exclusion.

The government has recently pledged £120m to tackle financial exclusion.

Source :-
http://news.bbc.co.uk/2/hi/business/4208979.stm