Former chancellor Philip Hammond first proposed the idea in 2018
Charities and community lenders have cautiously welcomed plans by the Treasury to provide £3.8m to pilot an Australian-style interest-free loan scheme for the hundreds of thousands of people who cannot afford high-cost credit.
Funding for the plan is finally getting good in a proposal first unveiled by former chancellor Philip Hammond in the 2018 budget to help those below the poverty line get credit.
The Treasury Department said Wednesday that the plan “will assist vulnerable consumers who would benefit from affordable short-term credit to meet unexpected costs as an alternative to higher-cost credit.”
The announcement of the £3.8m funding for the pilot comes 12 months after the publication of London Economics’ report on the viability of the loans, which took place between April and August 2019.
She said such loans can be feasible and can range from £100 to £2,000 and can be repaid over a period of between three months and three years.
It is estimated that 274,000 people can afford to pay back £500 over a year without interest and who would not be able to repay loans at an average community finance rate of 7.2 per cent, and 408,000 people are £1,000.
Figures published by the Joseph Rowntree Foundation in 2017 show that 11 million people live on 75 percent of the income needed for an acceptable standard of living.
Debt charity StepChange said these people may need interest-free loans to be repaid over a longer period because they lack the available income to pay off lower-interest loans.
The London Economics report said financing could come from the government, banks or the national lottery, while lending could be provided by a single central body or by regulated lenders.
The scheme is based on Australia’s Good Shepherd scheme which has provided loans to 125,000 low-income people of up to $1,800, about £1,000, to buy essentials.
The UK beta was designed by Fair4All Finance in partnership with Toynbee Hall and Fair by Design and Treasury and could launch ‘around mid-2021’, according to an update Fair4All published in January.
The UK unemployment rate is expected to peak at 6.5% – or 2.2 million people – in 2021
This would see a rehearsal ahead of UK unemployment reaching an expected peak of 6.5 per cent after the end of the furlough scheme in September and the expiry of the £520 six-month increase in global credit.
About 2.2 million people could be out of work, according to projections from the Office for Budget Responsibility, while the latest figures from the Joseph Rowntree Foundation estimated that 14.5 million people in the UK were already living in poverty before the pandemic.
And although the budget contained limited details of the pilot programme, the announcement of £3.8m of funding was greeted as a ‘big step in the right direction’ by charities and lenders, even if they said more details needed to be released.
Robert Kelly, chief executive of the Association of British Credit Unions, said: ‘We are committed to looking at the nitty-gritty and engaging member credit unions about ideas, but there are important outstanding questions that need to be answered before any of our member credit unions can. He will be persuaded to join and support him.
He wondered how much of the £3.8m would be used to cover the expenses of companies offering interest-free loans.
I think it is unrealistic to expect credit unions or other community finance companies to accept the entire risk without receiving the interest.
“Will loans be underwritten, and will any default balances be pursued?”
He added, ‘We recognize that financially vulnerable individuals can benefit from this scheme, but for some of the more vulnerable or financially strapped individuals, some form of social assistance schemes or grants would be far more impactful.
“For some, just having to pay down a line of credit will be quite a challenge.”
Sue Anderson of StepChange said: ‘We are very pleased to see the government moving forward with a pilot, something we’ve been asking for for a long time. What is needed is to quickly learn from the pilot and urgently scale up the concept to support people who have run up debt as a result of the coronavirus pandemic.
Strengthening short-term protection such as furlough would buy time for those in temporary financial hardship, but 1.2 million people affected by Covid face a severe debt problem, with another 3 million at risk.
Interest-free loan schemes can play a major role in helping them get back on their feet and speeding up the economic recovery.
Some of the links in this article may be affiliate links. If you click on it, we may earn a small commission. This helps us fund This Is Money, and keep it free to use. We do not write articles to promote products. We do not allow any commercial relationship to influence our editorial independence.