Local authorities have been urged to boost the resources of credit unions and to use council banks to offer affordable credit to vulnerable citizens that cannot secure high-street loans.
The call comes from The New Local Government Network (NLGN), which says the reduction in sub prime lending and the economic downturn may lead to an increase in the use of illegal money lenders.
The think tank says 200,000 people are at risk from illegal loan sharks because they cannot access credit from traditional lenders and that an additional 35,000 are likely to use this method during the recession.
Sub-prime lending, often known as 'door stop lending,' has declined significantly because of the initial slump. As many as 250,000 people could find themselves unable to secure funds through sub-prime lending if the difficulties continue.
Since the beginning of the downturn, the number of loans refused by the Government's emergency Social Fund has increased from 316,000 to 596,000.
The NLGN has also advised that local authorities need to protect their communities by combining increased funding with the mapping of predatory lending and enhancing enforcement against loan sharks.
Chris Leslie, author of the report, said the diminishing availability of regulated sub prime borrowing means people have no choice but to turn to loan sharks for loans which are often charged at extremely high rates of interest.
"Local government has historically been at the forefront of new service provision where community needs exist and have the advantage of proximity to their front line and prime local knowledge," he observed.
"Further intervention from local government is a crucial step and we look forward to strong leadership from the sector at a time of great urgency."
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