The latest budget from Philip Hammond has explored the possibility of offering zero percent loans to UK households struggling to keep up with their debt. The scheme is designed to give breathing space to those consumers who have fallen into a cycle debt by mounting credit card bills and high cost payday lending.
The scheme has already been successful in Australia, helping 4 out of 5 consumers come out of debt and remove their reliance on payday borrowing and illegal loan sharking. The plan also proposes an allocation of £2 million for tech companies to facilitate fast, affordable loan solutions.
The scheme will involve giving an upfront sum to up to 3 million people who are considered to be trapped in the cycle of high cost credit in the UK. The loan terms are currently outlined at 42 to 60 days without any interest payments on top. The criteria and eligibility for this scheme is yet to be confirmed, although giving £1,000 to 3 million people would result in allocating £3 billion – which is very unlikely at this stage.
MoneySavingExpert founder Martin Lewis has responded positively to the scheme, as someone who has regularly discouraged payday lending and other expensive forms of borrowing such as unauthorized overdrafts and rent-to-buy.
Labour MP Stella Creasy has always been very focal and openly critical about the payday lending industry and stated that she was happy with this development, but urged the ministers to go further by introducing an interest-rate cap on all forms of borrowing. She commented:
“Waiting for people to get into problems when we know what prevents them is not only cruel, it’s much costlier for all concerned.”
Shadow Chancellor John McDonnell warned of repeating the errors made with Universal Credit, something that had the reverse effect and has driven low income households into more debt as a result.
Payday loans comparison site allthelenders commented:
“Payday loans should only be used for emergencies purposes and taking out multiple loans or not keeping up with payments can cause a spiral debt. The new zero percent interest scheme could offer a lifeline to people that the people that need it most.”
Payday industry already under threat?
If payday lending is truly a market failure, the ‘invisible hand’ could see it become obsolete. The number of compensation claims and proposed refunds for previously funded loans is putting significant pressure on participating lenders.
Wonga.com, the face of the industry, was forced into administration last month after refunding over £200 million worth of loans where they failed to carry out appropriate checks. Following closely behind them is The Money Shop which has received an influx of complaints and last month stated that it is no longer accepting new applications.
Those customers who have relied on payday loans are getting wind that they can claim and gain compensation of up to £500. The process of simply making a complaint about a payday lender means that the provider has to pay an administration fee of £500 to the Financial Ombudsman Service – a cost that is having a greater detriment than the actual refunds.
A spokesman from Payday Bad Credit said:
“Customers who were given loans that they could not afford have the right to contact that lender and ask for a refund. If the loan put them under greater financial scrutiny and they had already had other loans open at the time, were unemployed or on benefits, they have a strong case to be refunded. They should contact the lender directly and avoid paying any commission through a broker or claims management company.”