Interest-Free Loan Program: How the Interest-Free Loan Pilot Works

The pilot initiative will expand beyond its existing areas in Herefordshire, Shropshire and Worcestershire to other parts of the UK

A broader government-backed initiative that provides interest-free loans to financially vulnerable people will help up to 20,000 more people.

The Treasury-backed interest-free (Nils) loan scheme, which is administered by credit unions and other credit institutions, has been successfully piloted in Manchester and will be rolled out to other locations in the UK in september.

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Its goal is to provide emergency loans to people who would otherwise be turned away due to their inability to pay the interest.

It is hoped the scheme will provide a low-cost alternative to the UK’s three million high-cost credit users, preventing people from going into debt or, in extreme situations, turning to loan sharks.

How does Nils work?

From September, the pilot program will be extended from its current location in Manchester to other parts of the UK for a period of two years, with a decision on whether it should be extended at a later date.

Customers are only allowed to take out one loan under the program, which can last from six to 18 months, although the average term is one year.

Borrowers can access between £100 and £2,000, with the average loan size being £500.

“We fund items ranging from household essentials and school uniforms to laptops to access education and training, and tools and equipment to help people get back to work,” Nils says on his site. website.

A key principle of the program is to only offer an interest-free loan when there is a benefit to society at large and the need cannot be covered by a grant or other support.

Loans so far have funded a variety of needs ranging from payment for driving lessons and initial child care fees to enable clients to return to work, to funds for housing deposits, essential furniture and white goods. .

In May, John Glen, Economic Secretary to the Treasury, expressed optimism that a large-scale program could be implemented in the future.

He told the Association of UK Credit Unions that Nils “is a fundamental and worthwhile new initiative, to provide a gateway product for people who at the moment are beyond the lending capacity of some credit unions”.

“The challenge now will be to bring this proof-of-concept pilot to a larger pilot so that we can now validate it.”

How is it funded?

The pilot project is being funded with £3.8m from the Treasury, £1.2m from JPMorgan Chase and up to £1m in loan capital from each of the devolved administrations, with matching from Fair4All Finance in England.

The Treasury and the Department for Culture, Media and Sport set up Fair4All Finance three years ago to “support the financial wellbeing of people in vulnerable situations”.

Joanna Elson, chief executive of Money Advice Trust, said: “Too many people fall into a vicious cycle of debt that starts with needing to borrow a small amount for something essential like a fridge or cooker – with high interest and quick charges. turn small debts into big problems.

“It is essential that we improve access to affordable credit for those who need it. »

Why is it necessary?

(Photo: Matt Cardy/Getty Images)

In January 2022, research by a charity showed that the number of people struggling to meet payments and credit commitments had risen by around a third since the start of the Covid-19 pandemic.

According to a survey for StepChange, almost a third of UK adults – 30% or 15million people – said they struggled to meet their financial obligations, up from 15% or 7.5million people in March 2020.

Its survey found that nearly 8.6million people in financial difficulty borrowed £26billion in 2021 to cover basic needs, including 3.5million using credit to pay essential bills.

The cost of living crisis, according to StepChange, is expected to increase the number of people using credit to cover basic household needs in the coming months, and the organization warns that “immediate action” is needed to help households to pay the necessary expenses without resorting to credit.

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