Around 200,000 people could be forced to turn to loan sharks because they cannot borrow money in the form of a secured loan or personal unsecured loan from legal sources, a think tank has warned.

A combination of the economic downturn and a reduction in the amount of secured loans and personal unsecured loans is leaving increasing numbers of people with little choice but to use loan sharks, the New Local Government Network said.

The group predicts an additional 35,000 people are likely to have to use loan sharks as a result of the recession, on top of the estimated 165,000 who already borrow from them, although it said the figure could be even higher.

It is urging local authorities to put additional resources into credit unions, which provide an alternative source of borrowing for people who cannot use banks and specialist lenders for secured loans and personal unsecured loans, as well as using council banks to help these consumers.

Loan sharks are illegal money lenders who charge high rates of interest, in some cases as much as 2,500,000%.

They tend to target vulnerable people and often use violence and force to get their money back.

The market for lending to people with impaired credit histories or those who want to borrow only small amounts has been hit hard by the credit crunch, which has impacted the availability and cost of wholesale funding.

One of the major firms involved in the secured loan and personal unsecured loan home credit market, Cattles, has stopped doing new business in the secured loan and personal unsecured loan market, while others have increased the rate at which they reject applications.

As a result, the think tank estimates that around 250,000 people will lose access to traditional secured loan and personal unsecured loan lending, and many will turn to loan sharks instead.

Author of the report Chris Leslie said: "There is evidence to suggest that the pernicious trend of illegal unsecured loan lending at extremely high rates of interest, or loan sharking, is making a comeback."

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Posted 25/05/2009 17:41:50