The 2021 Budget has included a commitment of £3.8m for the Treasury’s long-gestating plan to offer zero-interest consumer loans, which would act as an alternative to high-cost credit.
The government will begin with a no-interest loans pilot scheme, designed to help customers who may suddenly fall behind on regular payments including rent.
The details are thin in the Budget and the Treasury has dragged its feet in implementing the scheme. Previously, a study on the feasibility of the loan scheme conducted by London Economics, a think tank working for the Treasury in 2019, found that a range of loan amounts between £100 and £2,000 with durations between three months and three years would serve well the needs of the target user group.
London Economics stated in its findings the target users should be those who can’t afford loans with interest, but its report stated that the government needs to be sure that applicants can’t afford a typical interest rate on an alternative loan from a short-term lender, and would therefore require and need a zero-interest loan.
London Economics also stated that the eligibility criteria could be that, based on an assessment of their income and outgoings, the borrower is able to repay the loan principal; but cannot afford to repay the principal sum plus an average interest offered by alternative lender. The think tank also stated that the scheme should also set credit risk criteria calibrated to ensure an acceptable rate of repayment/risk of non-repayment.
Commenting on the Budget commitment, Richard Lane, director of external affairs at StepChange, said: "While it is helpful to see the Government’s continued commitment to the No Interest Loan Scheme pilot, the need to learn quickly from this and urgently scale up the concept is clear.
"In particular, we need the government to create a system of grants and interest-free loans that will allow renters to deal safely with arrears built up over the course of the pandemic."