There are plans to tackle the dominance of the payday loan industry, with the Chancellor of the Exchequer, Philip Hammond, announcing in the autumn Budget plans to create a no-interest loan scheme.
It is anticipated that this scheme, which is modelling itself on an a similar scheme that has been implemented in Australia, will be offered to over 3 million people on low-incomes in the UK. The aim is to not only help these people to reduce the cost of debt that they may have accumulate through high-cost credit lenders, but to also offer a more affordable alternative to payday lenders. It also hopes that it can avoid the most vulnerable in society getting into unmanageable debt in the first place, and in the worst case scenarios, turning to loan sharks in order to try and settle the amount they owe.
Hammond aims to team up with leading debt charities, lenders and banks to ensure that the no-interest loan scheme runs smoothly as possible. The Treasury has stated in the Autumn budget that a study will take place in 2019 in order to verify the feasibility of this scheme being rolled out across the country, with an initial pilot version of the scheme being created first.
Furthermore, in order to facilitate the smooth transition, the Treasury has announced that £2 million will be provided to help design the no repayment plans as a way to tackle the problem of illegal loan sharks. Grants will also be provided to technology entrepreneurs, as a way to spur them on into creating low-cost, reputable alternatives for customers against payday lenders. Mr Hammond also intends to extend the six weeks ‘breathing space’ given to customers in order to settle their debts to three months, before it will be possible for creditors to take action against them.
As previously mentioned earlier in the article, the Treasury has based this new plan on a scheme created in Australia that has been successful. Government officials highlighted that the scheme had helped four out of five who had used the no-interest loan to stop using payday lenders completely.
The plan by the UK government to introduce a no-interest loan scheme also comes in light of the recent demise of the largest payday lender, Wonga in August 2018. The company, which received huge criticism for mis-selling loans to customers, went into administration earlier in the year as a result of number of factors. This included payday lending clampdowns implemented by the Financial Conduct Authority, who introduced price caps of 0.8% for high-credit loan company in 2015 in an area previously unregulated. The collapse of Wonga was also due to the huge deluge of compensation claims made against them in recent years.
A number of high cost lenders have already starting implementing alternative products with a minimum of 3 to 12 months, with some offering 24 month products too, including Cashfloat, MY JAR and Lending Stream.