Alternative to payday loans launched by UK government

 

 

At the end of October, the chancellor of the Exchequer Philip Hammond revealed he plans to introduce an alternative to payday loans for those on low incomes. This was unveiled in the autumn Budget, and it has the aim to provide consumers with the option of a no-interest loan option.

 

The government’s plan intends to check the power of the payday loan industry, teaming up with leading UK based debt charities, as well as the banking industry, in order to clampdown on unfair lending practices, which many campaigners warn ultimately ends up affecting the most vulnerable in society, namely the elderly and the poor. It is hoped that the scheme, if implemented would provide a more affordable financial alternative to payday loans direct lenders, and reduce the chances of people turning to loan sharks or falling even further into debt.

 

The no-interest loan alternative is intended to be a less expensive option  for approximately 3 million individuals in the country who currently use high-cost credit from payday lenders, such as Wonga, which recently went into administration in August 2018, in part due to the overwhelming amount of compensation claims that were brought against them as a result of many customers being mis-sold loans. Price caps of 0.8%, implemented in 2015 by the Financial Conduct Authority to ensure better lending practices, were also thought to have contributed to Wonga’s demise. Previously, the payday lender giant had been charging customers interests in excess of a staggering 5,000 prior to the price caps being introduced.

 

In the Autumn budget, the Treasury stated that in 2019 a study will be launched in order to decipher the feasibility of such a scheme, as well as looking closely as to how a pilot version of the no-interest loan alternative could work across the UK. The Treasury also wants to extend the ‘breathing space’ that people have to get their finances back on track from six weeks to 60 days, as well as creating a £2 million fund for entrepreneurs to create products which make it easier for people to find affordable, reputable lenders.

 

The idea behind Hammond’s plan is partly fuelled by the success of a scheme similar in nature rolled out across Australia. Government officials have said that the Australian scheme has been a widespread success, helping four out of five users of no-interest loans to stop applying for loans with payday loan lenders entirely.

 

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