Are you paying more because you can’t pay upfront?

Former_MSE_Thiri · 16 March 2018 at 12:22PM

The term 'poverty premium' is used to estimate how much more low-income households pay than higher income households for the same goods and services.

It can mean that a typical low-income family can pay up to £1,700 per year more for the same essential goods and services as a similar higher income family. This is the equivalent of two months' rent outside of London.

The All-Party Parliamentary Group (APPG) on Poverty is holding an inquiry to understand the extent of the 'poverty premium' so that it can make recommendations to Government and businesses on how to tackle it. To do this the APPG wants to hear your thoughts.

There are many examples of the 'poverty premium' in practice, for example households on lower incomes are more likely to have to:

- prepay for their energy, even though this is more expensive than paying for it monthly
- use expensive credit like payday loans to make ends meet
- pay for household goods like TVs or washing machines in instalments, despite this sometimes costing three times as much as paying upfront
- pay for car or home insurance monthly, despite this costing more than paying annually

If the 'poverty premium' has affected you, please share your story below.

The APPG will be collecting your comments here until 28th March 2018.

CrazyCatLady · 16 March 2018 at 10:49PM

Hi Thiri,

I am on a low income.

My car insurance is costing me more due to having to pay monthly instead of annually. This is about £50 I am losing for the year.

I have not used payday loans since Uni years ago but I do have 2 credit cards with interest rates at 34.9% and 39.9% respectively as I don't qualify for lower or 0% interest cards with the bank. I must say I pay on time, every month, more than the minimum and have done so for 2 years. The interest is costing me a fortune.

Also, when I moved into my property I was in a position to pay for my water upfront for the year. I arranged this over the telephone with the water company. However, for some reason although it was done over the phone, the money never left my account. I was not aware of this until months later when I got an overdue notice letter. By then I no longer had the capital to pay for the year and so had to go onto monthly payment. This is costing me about £100 for the year.

sourcrates · 16 March 2018 at 11:46PM

I took a lesser paid job 8 years ago after been made redundant.

I was working up to 60 hours a week, in a stressful job, I now have a job with no stress, which suites me fine.

Marriage breakup and bad descision making has seen me insolvent twice, I am still living with the effects of a DRO on my credit file, and because of this, have to pay some things on a monthly basis, obviously I cannot access credit of any sort, but again, that suites me fine too.

Credit file is everything apparently, they are not interested in why you are in this situation, just that you are, Car insurance, house insurance, are all paid monthly, at a premium, but I am lucky in lots of other ways so can’t complain.

John-K_3 · 17 March 2018 at 12:06AM

When I was younger, and poorer, we used to go without to save up enough money that costs like this were not incurred. As we see from SOAs nowadays, that has gone right out of fashion. People who claim to be in penury are spending £50 on Sky, £35 on a mobile phone, and £50 going out, every month. Six months of going without would be £800 in the emergency jar, and no need to pay for so many things on instalments.

I cannott understand why those who could save a bit choose not to. As this article shows, choosing these treats can cost so very much in the long run.

There are so, so many people who post here who would be fine if they just forewent the extra spending for a year.

System · 17 March 2018 at 6:17AM

Never paid for any household goods in installments. If I couldn't afford them I did without or rescued broken ones and fixed them. Best bargains were a TV rescued from a skip that only needed an internal fuse and an almost new unused washing machine for £75 that a woman who'd just split from her husband was fire selling along with the rest of the contents of the house. Until I was in my late 30s, almost all of my cars were sub £500 and paid in cash, the last few of those lasted me a good 3/4/5 years each before selling them on to friends and family. My first foreign holiday I went on I was 37.

The majority of people who are suffering from this are doing so as a direct result of their actions buying stuff they couldn't afford on credit either currently or in the past.

John-K_3 · 17 March 2018 at 8:37AM

Tarambor wrote: »

Never paid for any household goods in installments. If I couldn't afford them I did without or rescued broken ones and fixed them. Best bargains were a TV rescued from a skip that only needed an internal fuse and an almost new unused washing machine for £75 that a woman who'd just split from her husband was fire selling along with the rest of the contents of the house. Until I was in my late 30s, almost all of my cars were sub £500 and paid in cash, the last few of those lasted me a good 3/4/5 years each before selling them on to friends and family. My first foreign holiday I went on I was 37.

The majority of people who are suffering from this are doing so as a direct result of their actions buying stuff they couldn't afford on credit either currently or in the past.

It is the short sightedness that I cannot get my head around. The throwing away of money when there is so little spare, knowing that the chickens will come home to roost just a short while later.

It is like my cousins lad who took out a payday loan to go to Ibiza for a week, and then spent a year struggling to stay ahead of the repayments. Same with Brighthouse, or paying for insurance in instalments.

The reason many people pay so much more of course is because many others default on the deal. People unable to pay upfront are much more likely to fail to pay down the line. The extra charges reflect this.

iolanthe07 · 17 March 2018 at 2:55PM

When I was young and broke, banks used to have an account called a 'budget account'. You agreed an amount for the year, divided by 12, and paid into it monthly. Bills (usually quarterly) would be paid out of this by cheque when they became due and the thing would balance itself out over the year. At the end of the year you either made up a shortfall or the bank paid you any excess. This worked really well, cost very little, and I can't imagine why these accounts were dropped. They probably didn't make enough profit for the banks.

another_casualty · 18 March 2018 at 1:20PM

Not sure if I'm explaining myself properly here,but my experiences:

Single man , low salary . Never missed payments on credit cards/ loans etc. Always had overdraft of £1,000 gradually increased to £1,500. In the early -mid 2000's ( the Clinton / Blair era), it seemed that the banks were chucking money at you if you have a lot of equity in your property. I did, and fell into that trap ,consolidating a few times. Not good . Whilst with Barclays , they took over woolwich building society . This meant ( I believe) their complicated way of increasing the fees on my overdraft . I didn't understand buffer zones/ daily charges and other caveats put into the new version of my overdraft. With credit cards( I used to have 2 max ) I used to get reminders from mint / Mbna at random times advising me of the % increase . I kept my head in the sand and carried on paying as I'm supposed to.( minimum payments sometimes more, bit never the full amount). The overdraft situation was getting out of hard though.
It was getting to the situation where m salary was not covering it.
This meant I started getting money from the cashpoints with my credit cards. Again not good . Bear in mind I lived in one of London's more affluent areas and had a lot of positive equity in my home.

My track record workwise was faultless . Permanent / temp it was never a problem finding employment . When I got made redundant with all my debts and started temping things got way out of hand.
I remortgaged . I never forget Santander more or less forcing me to open up a bank account and get a credit card to secure the remortgage. i remortgaged to consolidate and have some sort of cushion because being paid weekly temping is very insecure. The experience in the branch of Santander was surreal. Their head office for mortgages was in Northern Ireland . The pushy mortgage adviser of my local branch took me into an office ,, closed the door and I had to speak to a man with a very broad northern Irish accent . It was akin to talking to paisley or Gerry Adams . Talk about questioning ..
That was in 2007. About a year later I asked Barclays for a loan for£5,000. They refused. They recommended white label for a homeowner loan . I took it .£15,000 turned into over£20,000.I was then asked if per month) after the crash.

In 2012,I held up the white flag surrendered and went to payplan for a dmp. Even then when I told nationwide I didn't want an overdraft when I switched bank accounts I was guaranteed a £1,500 overdraft and a credit card. I never used the credit card. The overdraft was used and if you're on a dmp you are not supposed to have an overdraft at all.

I tried remortgaging for the best deal a couple of years ago ,and got declined . Payplan recommended a company that helps people try and find mortgages for people with bad credit ratings. Reach financial services. Even they couldn't help. They tried on more than one occasion .
After this and feeling at my lowest ever I decided to sell the flat ,quit everything , move to another area altogether , buy a flat mortgage free and start all over again . I t affected my health. I am far happier although I hardly know anyone . I just have to get a part time job now..

sourcrates · 18 March 2018 at 1:51PM

John-K wrote: »

When I was younger, and poorer, we used to go without to save up enough money that costs like this were not incurred. As we see from SOAs nowadays, that has gone right out of fashion. People who claim to be in penury are spending £50 on Sky, £35 on a mobile phone, and £50 going out, every month. Six months of going without would be £800 in the emergency jar, and no need to pay for so many things on instalments.

I cannott understand why those who could save a bit choose not to. As this article shows, choosing these treats can cost so very much in the long run.

There are so, so many people who post here who would be fine if they just forewent the extra spending for a year.

Tarambor wrote: »

Never paid for any household goods in installments. If I couldn't afford them I did without or rescued broken ones and fixed them. Best bargains were a TV rescued from a skip that only needed an internal fuse and an almost new unused washing machine for £75 that a woman who'd just split from her husband was fire selling along with the rest of the contents of the house. Until I was in my late 30s, almost all of my cars were sub £500 and paid in cash, the last few of those lasted me a good 3/4/5 years each before selling them on to friends and family. My first foreign holiday I went on I was 37.

The majority of people who are suffering from this are doing so as a direct result of their actions buying stuff they couldn't afford on credit either currently or in the past.

You are both right, and unusually I find myself agreeing with you, but just playing devils advocate for one second, ideally what you describe would be the norm, however people are fickle things, and temptation in all its forms, is hard to say no to.

When i was 18, back in the mid 80`s, Banks were throwing money at you, credit cards, loans, especially loans for cars, you were bombarded by junk mail (no internet back then) telling me i was pre-approved for a credit card, or a loan, at the time i was earning £2.27 an hour, and a £1550 car loan would buy me a smashing 1979 red ford Capri 1.6 L babe magnet, my arm did not take much twisting, i see this now as the start of the slippery slope, the next 25 years dependent on some form of credit or the other.

The thing is, its hard to get off the roundabout, once its started, you get used to the cycle of borrowing, and consolidation, it starts to feel like the norm, best possible advice is to do without credit altogether, but when your young, you are very susceptible to these things, in the same way the cigarette companies plied their trade, the banks acted in a similar fashion, and it does take a strong will to say no.

Some people can mange credit well, but the majority cannot, and i would still put myself within that latter group, one reason why personal debt is at an all time high in the UK, its like being an alcoholic, it would only take one drink to set the ball rolling again........!!

John-K_3 · 18 March 2018 at 9:54PM

iolanthe07 wrote: »

When I was young and broke, banks used to have an account called a 'budget account'. You agreed an amount for the year, divided by 12, and paid into it monthly. Bills (usually quarterly) would be paid out of this by cheque when they became due and the thing would balance itself out over the year. At the end of the year you either made up a shortfall or the bank paid you any excess. This worked really well, cost very little, and I can't imagine why these accounts were dropped. They probably didn't make enough profit for the banks.

Not only not enough profit, it probably cost them money, too. Once upon a time the sense of shame from not paying your debts would mean that people move heaven and Earth to make sure that they did. As we see from advice on here nowadays, the world is a very different place, and people have no problem just defaulting and walking away.

As in so many things, those acting in bad faith have harmed everyone else.

It will get worse, as we see people frozen out of mainstream finance more and more.

To anyone thinking of defaulting, or advising people to default, please bear in mind the harm that you do.

indigowarrior · 18 March 2018 at 10:25PM

I have always been bad with money until about 4 months ago. However, 18 months ago I took out 4 payment agreements with Bright house and then Perfect Home. I was swept up in the urge of having these items but, didnt consider the cost.
I paid £750 for 42 inch 3D smart television second hand with Brighthouse (Still dont have the remote)
I paid £800 for iphone 6 with Brighthouse
They were both paid off in October 2017
I then got a large American Fridge freezer and a Samsung Galaxy S7. (Which I then sold to buy food when I had 5 week wait to switch to UC)
I then lost £750 a month income and lost my home.
I found Perfect Home easy to deal with. They were understanding and gave me several payment breaks. They took back the fridge no problems. I couldnt return the phone. (obviously) Luckily I only have 8 payments left. (2 months to go)

I will never again use buy to let. I would rather wait and save. I can see WHY people do it but I now warn people against it.

My credit rating is in tatters. My focus once I have a permanent place to live is to clear all my debts and try never to have credit again. Even though I would love to own my own home I dont see this happening.

Are you paying more because you can’t pay upfront?

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