Budget: government to tackle payday loans with interest-free loan program
“This should be welcomed, but there must be big question marks as to whether it can work in practice.”
The government is about to launch a new pilot interest-free loan program as an alternative for those who currently borrow from high-cost lending companies.
In its budget documents, the government said that “for some people even borrowing from social and community lenders can be unaffordable.”
It will partner with charities and the banking industry to provide interest-free loans to low-income people.
The government has claimed that a similar program in Australia has had general success, helping four in five people who have taken out an interest-free loan to stop using payday loans.
However, some wondered how the program would work in practice and how the loans would be subsidized.
Richard Lane, Director of External Affairs at StepChange, commented: “After years of campaigning for an interest-free loan program, we look forward to working with the government and the banks to make it happen. Over a million people turned to high-cost credit last year to cover their daily expenses, which is counterproductive for both households and the economy.
“If finances are tight and your refrigerator breaks down, the last thing you need is expensive credit – what you need is just a replacement refrigerator. new program will demonstrate how interest-free loans can act as a realistic and better alternative to high-cost short-term credit. It can only be a good thing to reduce the risk that households run into problem debt when trying to meet to their basic needs.
Greg Stevens, CEO of CCTA, said: “This should be welcomed, but there must be big question marks as to whether it can work in practice.
“Looks like this ‘zero interest’ pilot is based on Australia’s Good Shepherd program. The Australian program is very small – it has been running for 36 years but only lent 27,000 loans in 2017. It’s tiny. compared to smaller commercial lenders.
“Also, these 27,000 loans in Australia are probably the least problematic in terms of default and bad debt – once you start to scale up, these problems inevitably multiply.
“The reality is that, as with all nonprofit, social or subsidized loan programs, this new government program will face the same challenges that commercial lenders face every day: clients who only want small loans. short term (which significantly increases the unit cost compared to larger, longer term loans), high levels of bad debt, very high loan service costs.
“The only way to cut costs is to subsidize loans. The government can do it itself or it can get the banks to do it. We understand that the banks have been asked to support this program by making platforms available and providing information.It is up to the Chancellor and the banks to report on how this is going, but rumor has it that there is have a lot of reservations.
“Subsidizing the cost of loans is one thing, but you also need the right systems to manage a complicated loan portfolio with all kinds of social problems. It requires a loan model designed around what customers actually do (not what activists want them to do); and that requires professionalism. This is why credit unions typically fail despite millions of government grants each year – the product design is poor, the systems are substandard, and they are unprofessional. “