Treasury Interest-Free Loan Pilot Project for Distressed Borrowers
Treasury pledges to fund £ 3.8million interest-free loan pilot project for distressed borrowers ‘a step in the right direction’, say charities and lenders
- The program could help those who cannot afford to pay interest on loans
- It is based on an Australian-style community loan program
- The initiative was proposed by former Chancellor Philip Hammond in 2018
- According to an article published last year, up to 408,000 could benefit
Former Chancellor Philip Hammond first proposed the idea in 2018
Charities and community lenders have cautiously greeted Treasury plans to provide £ 3.8million to pilot an Australian-style interest-free loan scheme for hundreds of thousands of people who cannot afford high cost credit.
Funding for the program finally responds to a proposal first unveiled by former Chancellor Philip Hammond in the 2018 budget to help people living below the poverty line access credit.
The Treasury said on Wednesday that the program “will help vulnerable consumers who would benefit from affordable short-term credit deal with unforeseen costs as an alternative to high-cost credit.”
The announcement of £ 3.8million to fund the pilot project comes 12 months after the publication of a London Economics report on the feasibility of lending, which was carried out between April and August 2019.
Such loans could be achievable and could range from £ 100 to £ 2,000 and be repaid over a period of three months to three years, he said.
It is estimated that 274,000 people could afford to repay £ 500 over one year without interest who would otherwise not be able to repay loans at the average community finance rate of 7.2%, and 408,000 people £ 1,000.
Figures released by the Joseph Rowntree Foundation in 2017 estimated that 11 million people lived on 75% of the income necessary for an acceptable standard of living.
Debt charity StepChange said these people may need interest-free loans paid off over a longer period because they lacked the income available to pay off loans with even lower interest.
Funding could come from the government, banks or the national lottery, according to the London Economics report, while loans could be provided by a centralized body or by regulated lenders.
The program is based on Australia’s “Good Shepherd” program which has provided loans to 125,000 low-income people of up to $ 1,800, or around £ 1,000, to buy basic necessities.
The UK pilot version is being designed by Fair4All Finance in partnership with Toynbee Hall, Fair by Design and the Treasury and could be launched “around mid-2021”, according to an update released by Fair4All in January.
UK unemployment rate set to peak at 6.5% – or 2.2 million people – in 2021
That would see him pilot before UK unemployment hits an expected peak of 6.5% after the holiday scheme ended in September and the six-month £ 520 hike in universal credit expired.
Some 2.2 million people may be out of work, according to the Office for Budget Responsibility forecast, 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 while the budget contained limited details on the pilot, the announcement of £ 3.8million to fund it was greeted as “a big step in the right direction” by charities and lenders alike. if they said more details should be released.
Robert Kelly, Managing Director of the Association of British Credit Unions, said: “We are committed to looking at the finer details and involving member credit unions on ideas, but there are still important questions unresolved. resolve before one of our member credit unions. will be convinced to join and support him.
He asked how much of the £ 3.8million fund would be used to cover expenses for companies offering interest-free loans.
“I think it’s unrealistic to expect credit unions or other community finance companies to take the full risk without interest earned.
“Will the loans be guaranteed and will default balances be sought?” “
He added, “We recognize that financially vulnerable people could benefit from this program, but for some people who are most vulnerable or in financial difficulty, some form of social assistance program or grant would have much more impact.
“For some, simply paying off the line of credit will be a huge challenge.”
And Sue Anderson of StepChange said: ‘We are very happy to see the government moving forward with a pilot project, something that we have been calling for for a long time. What is needed is to quickly learn from the pilot and urgently expand the concept to support people who have accumulated debt as a result of the coronavirus pandemic.
“Strengthening short-term protections like leave will save time for those in temporary financial difficulty, but 1.2 million people affected by Covid are in serious debt, with an additional 3 million at risk.
“Interest-free loan programs can play a major role in helping them get back on their feet and accelerating economic recovery.”