Payday loan provider 247Moneybox.com considers the recent announcement in the 2018 Budget by the Chancellor of the Exchequer, Phillip Hammond, that the Government will explore the possibility of interest free loans to hard up individuals. The Firm examines such a scheme, where the idea came from, the aims, the impact and opinion on the chances of meeting those aims.
The context of the discussion is a positive one in that the lender recognises that some people currently don't have access to credit and that credit isn't necessarily a bad thing if used correctly. So much focus whenever credit and debt are discussed is about cases where it goes wrong but very rarely if ever when it goes right. There are plenty of examples of business loans being championed enabling firms to grow and prosper but we hardly ever hear a similar story from individuals. Why is this? In this country borrowing money has a social stigma attached that somehow a person has failed if they need credit at some point. This societal pressure or attitude seems to increase when small amounts of credit are concerned. The pressure might not be directed at the borrower but there is an element of the commentary that is particularly condescending and patronising.
According to the announcement the idea came from the Good Shepherd programme in Australia where an interest free loans scheme is seeing a reduction of individuals looking for high cost forms of credit. According to statistics released by the programme, 4 out of 5 people who could have turned to payday loans were instead offered these interest free loans. Undoubtedly this is a success in enabling people to borrow far cheaper than if they had to access the commercial market so it is unsurprising that other governments are exploring these super subsidised forms of borrowing as one alternative to high cost short term credit.
Philip Hammond actually announced before the autumn budget that the government is looking to introduce interest free loans to those they say are trapped in a cycle of debt. The Government estimates that 3 million people are in this situation and that these new loans will help them to break out of the so-called debt spiral. The aim is to ensure credit is available, but one which doesn't add to the problem or "kick the can down the road".
Politically it's a very sensitive time for the Government with the last budget before Brexit aiming to soften any potential hard landings when the UK leaves the EU. Whether this situation ever comes about as envisaged by the leavers is a whole different article! The timing is also key when set in the context of the announcement to the beginning of the end of austerity, imposed on the country following the credit crunch and subsequent recession from 2008 onwards. Many campaigners have been calling for a Government response to all forms of high cost credit be that overdrafts, rent to own, doorstep lending etc. The Sun newspaper, as just one example, launched their Stop the Credit Rip-Off campaign to put an end to, or significantly curb business models such as rent to own, doorstep, guarantor and payday lending to protect vulnerable people from taking out high-cost credit options with potentially unaffordable repayments.
A further subject to consider is the impact of the Government flagship policy - Universal Credit. Implementation of this single all-encompassing benefit has been less than smooth which has resulted in timing lags and gaps of payments. This has artificially created cash flow issues for arguably the very same vulnerable individuals and households that the anti-high cost credit campaigners wish to see much tighter protection measures for. The result has not been positive. Studies from the debt charity StepChange indicate that as many as 1 in 7 people took out credit in 2017 to meet general spending and household needs.
Any measure that helps elevate the pressures of austerity sustainably should be encouraged and feasibility studies carried out where applicable. On the face of it the scheme is a tough one for the Government to undertake as it is likely to require a large public subsidy. Given that the credit union sector, which has the aim of serving a similar demographic, struggles commercially to provide low interest loans (max 42.6% APR) then it is clear that the scheme will require substantial funding. Given the pressures on the public purse at this time it is not clear where this money will come from. Overall, we along with many other interested parties will await the findings of the feasibility study sometime in 2019.