Earlier in the week, an Iceland supermarket launched an interest-free micro-loan scheme with lender Fair for You, to help customers manage the cost-of-living crisis.
Within a day, demand on the scheme was causing delays to the Fair for You website with applications taking an hour to be approved, compared to the site’s usual response time of 20 minutes.
During the rest of the week, there was a pop-up warning customers to slow down thanks to demand.
Shoppers can apply for small loans from £25 to £75 payable in weekly instalments of £10, without interest. Users can top up in six periods, timed to Iceland time to coincide with school holidays, up to a maximum of £100 credit at a time.
Scheme Iceland offers interest-free small loans of between £25 and £75 taken on a preloaded card and can be paid back in weekly £10 instalments.
The nonprofit lender has seen demand spike over the past six months as the cost-of-living crisis begins to take a toll on household finances.
The consumer price index increased by 10.1 percent in the 12 months to July 2022, driven in part by higher food prices, which rose by 12.7 percent in the same period.
Households have also been severely affected by the rise in energy prices. New analysis from Citizens Advice shows that a quarter of households will not be able to afford their energy bills in October based on current projections. Bills are expected to cost more than £4,000 a year in 2023.
Fair for You offers low-interest loans to customers with poor credit who cannot access financing elsewhere.
Founded in 2017, it aims to address the cyclical problem that low-income people pay the most to borrow money.
“So you have this strange, unfair and unfair situation where the poor pay more than the rich for loans,” says Simon Dukes, CEO of Fair for You.
The lender operates through two main schemes, one is where customers can access credit to pay for a one-off large household appliance, such as a refrigerator.
The second is where loans are made on a prepaid “shopping card” that can be used at retailers including Argos, Chemist Direct and others that provide everyday household necessities.
On Wednesday, August 17, demand for a food club scheme in Iceland caused delays at the non-profit lender’s Fair for All website.
The food club I launched with Iceland is an extension of that.
After strong regional trial, an independent assessment found that 95 per cent of users found the scheme beneficial, with 71 per cent less likely to default on rent, council tax and other bills as a result. And there was an 80 percent decrease in the number of people using loan sharks.
“We’ve seen continued demand for our services,” says Dukes. “If anything I think we’ve seen a slight change in what people are looking for.
Before the fall of last year, people were looking to buy a refrigerator or a washing machine with us.
“We’ve seen that side of the business shrink and instead people are now looking to buy with a cart; smaller items and everyday things you need every few months.
The Consumer Price Index (CPI) increased 10.1% in the year to July 2022, driven in part by higher food prices, which rose 12.7% in the same period.
The trend, he explains, is that people are now living week-to-week rather than month-to-month.
Anecdotally, he adds, there was more money available to people in Covid, but now the cost of living plus a return to a more regular lifestyle means people are less likely to stick to larger things like washing machines.
What’s more people are now taking longer to repay loans. When possible, the team at Fair for You encourage clients to overpay their payments in order to pay them off faster as this helps with budgeting in the long run.
Over the past two to three years, borrowers have, on average, paid back 12-month loans within six or seven months.
He says that has now risen to 10, and is expected to rise to 12 next year as the cost of living crisis continues with rising inflation and energy bills.
“It’s an indicator of the stress people are under,” Dukes adds. “The only thing that might skew it is if people want to pay it off early because they know they’re going to see a new bill coming.”
What worries the Dukes is the impact of buy-now-pay-later lenders that remain unregulated by the Financial Conduct Authority.
Although not a not-for-profit lender, Fair for You is regulated by the Financial Conduct Authority (FCA) and so is required to carry out affordability checks on clients before approving a borrowing request.
Klarna has announced that it will open up its data to consumer credit reports, but other lenders like ClearPay haven’t yet done the same, putting its customers at risk of incurring unsustainable debt.
“This is my concern with some unregulated lenders – it may be that you can afford a loan today but on November 17th that loan is no longer affordable and that’s irresponsible lending in my view,” he says.
“When you get the applications, you should ask ‘Can this person afford this loan in six months’.”
He insists more needs to be done to improve financial inclusion in the UK to benefit the 14 million people in the country who currently do not have access to affordable financing, and believes passive asset financing could be one solution.
Fair for You has been able to significantly increase its social impact thanks to Dormant Assets funding in 2020.
“The current cost of living crisis makes the case for investing in financial inclusion even more urgent, and we hope the government will make the most of this opportunity to improve the lives of those in financially vulnerable circumstances,” he explains.
The lender argues that additional funding through this financing will enable it to make progress in dramatically increasing access to affordable credit and to pilot and scale new financially inclusive solutions such as consolidation loans and fair and affordable insurance.
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