No-interest loan pilot from Treasury for hard-up borrowers

Former Chancellor Philip Hammond first proposed the idea in 2018

Charities and community lenders have cautiously welcomed Treasury plans to provide £3.8million to pilot an Australian-style system of no-interest loans for hundreds of thousands of people who cannot afford high-cost credit.

The funding for the scheme finally makes good on a proposal first unveiled by former Chancellor Philip Hammond in the 2018 Budget to help those below the poverty line access credit.

The Treasury said on Wednesday the scheme ‘will help vulnerable consumers who would benefit from affordable short-term credit to meet unexpected costs as an alternative to high-cost credit.’

The announcement of the £3.8million to fund the pilot comes 12 months after publication of a report by London Economics into the feasibility of the loans, which had been carried out between April and August 2019.

Such loans could be feasible and could range from £100 to £2,000 and be paid back over a period of between three months and three years, it said.

An estimated 274,000 people could afford to repay £500 over a year with no interest who would not otherwise be able to pay back loans at the average community finance rate of 7.2 per cent, and 408,000 people £1,000.

Figures published by the Joseph Rowntree Foundation in 2017 estimated 11million people were living on 75 per cent of the income needed for an acceptable standard of living. 

Debt charity StepChange said these people could need interest-free loans repaid over a longer period as they lacked the disposable income to pay back even lower interest loans.

Funding could come from the Government, banks or the National Lottery, the London Economics report said, while lending could be provided by one centralise body or by regulated lenders.

The scheme is based on the Australian ‘Good Shepherd’ scheme which has provided 125,000 low-income people with loans of up to $1,800, around £1,000, to purchase essentials.

The UK’s pilot version is being designed by Fair4All Finance in partnership with Toynbee Hall, Fair by Design and the Treasury and could be launched ‘around the middle of 2021’, according to an update published by Fair4All in January.

The UK’s unemployment rate is expected to peak at 6.5% – or 2.2m people – in 2021

That would see it piloted ahead of UK unemployment reaching a forecasted peak of 6.5 per cent after the end of the furlough scheme in September and the expiration of the £520 six-month uplift in Universal Credit.

Some 2.2million people could be out of work, according to the forecast from the Office for Budget Responsibility, while the latest figures from the Joseph Rowntree Foundation estimated 14.5million people in the UK were already living in poverty before the pandemic.

And while the Budget contained limited details on the pilot, the announcement of £3.8million to fund it was welcomed as ‘a big step in the right direction’ by charities and lenders, even if they said more details needed to be released.

Robert Kelly, the chief executive of the Association of British Credit Unions, said: ‘We are committed to looking at the finer detail and engaging member credit unions on the ideas but there are significant outstanding questions to be answered before any of our member credit unions will be convinced to join and support it.’

He questioned how much of the £3.8million fund would be used to cover expenses for the firms which offered no-interest loans.

‘I think it’s unrealistic to expect credit unions or other community finance firms to accept the entire risk with no interest earned. 

‘Will the loans be underwritten, and will any default balances be pursued?’

He added: ‘We recognise that financially vulnerable individuals could benefit from this scheme, but for some individuals who are most vulnerable or financially distressed some form of welfare assistance programme or grant would be much more impactful. 

‘For some, just having to repay the credit line will be a huge challenge.’

And StepChange’s Sue Anderson said: ”We’re very pleased to see the Government pushing ahead with a pilot, something we’ve long called for. What’s needed is to learn quickly from the pilot and urgently scale up the concept to support people who’ve accumulated debt as a result of the coronavirus pandemic.

‘Strengthening short-term protections like furlough will buy time for those experiencing temporary financial difficulty, but 1.2million people affected by Covid are in severe problem debt, with a further 3million at risk of it. 

‘No-interest loan schemes can play a major role in helping them back to their feet and speeding up economic recovery.’ 

This post first appeared on Dailymail.co.uk