Britishers Using Universal Credit Forced To Approach Loan Sharks

• StepChange, a debt charity working in the UK, has highlighted how the new welfare system is ill-designed to meet the needs of vulnerable families.
• The current waiting time to receive the initial benefit under the new program has come under criticism.
• Unforeseen deductions combined with a major chunk of the benefit going into loan repayment is creating increasing financial problems for claimants.

According to a report that has been released by StepChange, a charity operating in the UK and focusing on debt issues, low-income families that are claiming universal credit are at specific risk when it comes to facing debt problems. The charity has claimed that this causes such vulnerable families to seek loans from lenders that charge excessively high rates to cover basic everyday necessities, causing long-term debt problems for the borrowers.

StepChange has highlighted that the problem stems from the structure of universal credit, especially the waiting period of 5 weeks before the initial benefit payment is released. For comparison, the previous system of benefits had around 50% less waiting time.

Naturally, those relying on these funds are forced to take alternative measures. In 2019, around 50% of all universal credit recipients had to seek out a high-rate loan to cover basic expenses.

This waiting period is meant to establish a habit among middle-class families to get accustomed to monthly payments. However, the people who were used to receiving payments weekly or fortnightly are now facing issues with making ends meet, as many don’t have any savings to cover the income deficit.

The charity has now proposed that the way universal credit has been designed should be drastically changed, calling for greater flexibility and generosity in its operations for the most vulnerable segments of society.

The report highlighted that around 25% of all claimants were facing issues with debt, which is around three times that of the general population facing similar issues. The majority found it difficult to manage finances towards the end of each month, as just 6% of respondents to the study said they were able to meet their budget. 46% said they crossed over the red line into debt towards the end of every month. Over 33% found themselves using food banks or other similar facilities.

Although these statistics were already known, the new study has shown how universal credit is actually worsening the financial situation of many British people, at least compared to the legacy system of benefits.

StepChange has also highlighted that the new advanced loan system that has been introduced by the Department of Work and Pensions (DWP) is not able to achieve its purpose of helping people manage finances during the long waiting time of 35 days before the first benefit is released.

These loans require around 33% of the benefit’s amount to be deducted every month for a period of one year, which transforms a short term financial problem into a long term issue for many claimants. Also, certain other deductions often accompany loan repayments, such as council tax debts or even the overpayments on the tax credit, which the claimant only becomes aware of once they receive the lower-than-expected amount in benefits.

According to StepChange, its clients were coping under such conditions by either reducing their expenditure on food items or asking for help from their loved ones. These deductions caused almost 50% of respondents to miss their loan repayments, while 10% had to approach loan sharks for help.