It can be difficult to get a loan when you’re on a low income, as banks are reluctant to lend to those who don’t pass stringent affordability tests.
Even if you do get accepted, high levels of interest can take a struggling household’s finances from bad to worse. However sometimes the money from a loan can be a lifeline – allowing people to pay the hefty upfront costs for things like white goods or driving lessons, and pay it back in more manageable chunks.
Enter the no-interest loan scheme. Following a successful pilot in Manchester, it is now going to be rolled out to other parts of the UK – offering interest free loans from £2,000 to 20,000 per households. The scheme will be administered by local credit unions and backed by the treasury. It’s also being part run by Fair4All Finance, a charity that was founded to support the financial wellbeing of people in vulnerable circumstances.
Accessing the scheme
The scheme will only be accepting referrals, not applications, which means that people will currently only be able to access it if they are recommended by their housing association, credit union or other lender. There will also be eligibility criteria, including that borrowers will need to have already have applied – and been rejected for – a standard loan.
How it will work for borrowers
The actual rules around repayments are relatively flexible, reflecting the fact that these loans are designed to give support to those who need it. The money will be paid in one lump sum within a couple of days of applying. It will then need to be repaid in weekly or monthly instalments over the course of 6 – 18 months. To give a simple example, a £500 loan repaid over 12 months would mean monthly repayments of just over 40 pounds. There will also be the option of payment holidays if required.
Potential to expand the scheme further
Although its now being rolled out to 20,000 people, the scheme is still technically in the pilot stage. It will be closely monitored over the next two years, and then a decision will be made about whether or not to continue, along with the possibility of expansion.
A spokesperson for the treasury said that the scheme “is a fundamental, worthwhile new initiative, to provide a gateway product for people who at the moment are beyond the lending capacity of some credit unions.” We certainly agree that this seems like a very worthwhile project that could make a meaningful difference, giving people the funds to make essential purchases.
It is part of a bigger effort to put affordable credit on the agenda, with debt charities like StepChange also publishing research to show how access to loans that don’t break the bank could help get families out of the debt cycle and meet unexpected costs
It’s exciting to see this work coming to life after a successful pilot, and we will look forward to seeing how it progresses over the next couple of years – so watch out for updates.