Investors who are ethical help financially vulnerable people to avoid predatory lenders

Jun 3, 2024 | News

Socially conscious investors fund organisations that provide fair and affordable credit for those in greatest need. We look at how ordinary people invest to support families who are at risk when banks fail them.

Would you invest in financial companies? This question is probably aimed at a specific demographic, like venture capitalists. It also has a goal of soaring profit. What if you were told that the finance company offered loans? You might think that predatory marketing techniques are at work, designed to take advantage of those who are in need. There is another way to do business that aims to help, not exploit, the financially vulnerable.

Ethex gives everyday people the chance to invest in projects and companies that are committed to social changes. Ethex allows investors to choose from a wide range of socially conscious organisations to invest in, knowing that their money will help those in need. Many of the companies raising money through Ethex are ethical financial companies that help people with low credit scores or no credit score access financial products. They have strict terms to protect their customers.

Take Great Western Credit Union in south-west England, a cooperative, not-for profit provider of ethical savings, loans and other financial services. Customers are members of the credit union, which means they have a voice in how it is run. The Financial Services Compensation Scheme (FSCS), which protects the savings of members, pools them together to provide affordable loans for people in the entire region. Last year, the organisation raised more than PS1.9m via Ethex. This was 237% higher than its target of PS800,000. All funds contributed to the growth of lending and improved offerings to meet changing needs.

Positive investment opportunities Ethex helps everyday people use their money to invest in organisations that have a positive social and environmental impact. Visit Ethex to find out how you can become a member.

Fair for You has closed its funding round at Ethex, after raising 131% its PS500,000 target. Customers can perform a soft-search to see if they qualify for a loan. This will not appear on their credit report. They can then choose the item they want from a partner retailer and set their own repayment terms.

There is a clear demand for these companies, with 18% of UK’s population classified as being in relative poor in 2022-23. [Relative poverty means earning less than 60% of the median income for that year]. Salad Money, the UK’s largest CDFI (community development finance institution), is currently running a funding campaign on Ethex. Its main objective is to provide money to those who need it but are unable to get conventional credit because of a low or non-existent score. Salad Money does not lend more than PS1,000 to its customers to avoid them getting into debt.

Salad Money CEO Tim Rooney explains that “we’ve been invested by a company named Fair4All which is the government distributer of the dormant assets monies.” Dormant assets include bank accounts, pensions, or investments that have not been accessed in a long while. If the money cannot be reunited with its owner, it is redistributed for social and financial inclusion.

Tim Rooney is the CEO of Salad Money

Rooney continues, “We lend to people with impaired credit scores.” “They are typically people in the lower four to five deciles of incomes in the UK. We’re good at it because we don’t use credit scores to make a decision. Instead, we use open banking. We look at the last two years of transactions and the customer gives us access to their account. We look at their spending, if there are any missed payments and the information on their credit file. Around 10% of our borrowers do not have a credit rating, but they are just as financially successful as those who do.

Open banking is not only a great way to assess someone’s eligibility for a loan but also has another benefit. Salad Money can determine based on someone’s income or circumstances if they are entitled to benefits that they were not aware of.

“Nobody had ever told about disability living allowance,” says Jenni. A senior healthcare support worker in Manchester, her credit score was severely affected by debts incurred from purchasing items from catalogues with credit and loans that she had taken out more than 20 years earlier.

About 10% our borrowers do not have a credit rating, but they perform as well financially as people with one

She didn’t realize that her son was autistic and that she could receive additional benefits. “I found out about disability living allowance only after Salad’s calculator told me I may be eligible. I submitted the claim and was actually entitled to it. The additional PS350 per month she now receives gives her a much-needed boost.

She says that if you applied for a regular loan, they wouldn’t tell you what benefits you could get. “They will give you a loan with interest rates that are as high as kites, but with Salad Money it is affordable and you don’t pay loads back.”

Salad Money is a program that provides monthly benefits of approximately PS247 to more than 28,000 Salad Money recipients.

Salad Money will never lend more than PS1,000 to its customers to avoid them getting into debt. Image: Sarah Chai

Rooney wants to explain why Salad Money has an APR of 79.5%. (Average credit card interest rates are currently around 22%) “The truth is that you can only get products with a lower interest rate, like a 20% credit card, if you’ve got a good score,” he says. “I don’t charge people more just to make more money. I have to provision for each loan to include the lifetime loss. This is the percentage of loans that are not paid back.

Calculations show that Salad Money offers a cheaper alternative to payday loans, even with a high APR. At 79.5% the monthly repayment amount for a PS1,000 loan over 12 months would be PS113.18. A typical payday loan is around PS166.67 a month. However, the APR could be as high as 1,000% with some providers. Salad accepted 5,778 loans in April 2024. They lent a total amount of PS5.4m and saved customers PS3.2m on interest.

It’s all about real people, fighting financial inequality and a fair way to borrow that won’t break the banks

Rooney says, “We receive 3,000 applications per day and reject 95% of them.” We are a Financial Conduct Agency regulated entity. Therefore, we can only loan to people if it is affordable and appropriate.

It’s not the end of the line for people who are in financial difficulty. In 2023, six CDFIs, including Salad Money, distributed PS416,600 of ‘no strings attached’ NatWest Group hardship grants between PS50 and PS100.

Salad Money or any other ethical finance company raising money via Ethex is not about making huge profits. It’s all about real people and tackling financial inequalities. It’s also about a fairer borrowing method that won’t break the budget.

Main image: Pixdeluxe/iStock

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