UK Government, Lenders Cooperate on Interest-Free Loans

Amid the current cost of living crisis in the United Kingdom, some commercial lenders have joined forces with the British government to offer interest-free loans to high-risk borrowers.

The government is funneling 45 million pounds ($57 million) from its Dormant Assets Scheme — previously set aside to redirect money from forgotten accounts to good causes — to London-based nonprofit Fair4All Finance, which will distribute the money to a range of lenders taking part in the two-year pilot, Reuters reported Tuesday (Aug. 15).

Amongst these lenders are Social Credit — a collaboration between commercial startup lender Plend and two unnamed nonprofit organizations — as well as Fair For You and the South Manchester Credit Union, according to the report. All of these organizations are providing interest-free loans as part of the scheme.

The program aims to tackle the sizeable gap in the credit market following the collapse or departure of many payday lenders.

A survey conducted by PwC and credit broker TotallyMoney revealed that roughly one in three Britons are prevented from accessing credit from high street lenders due to their lack of a credit score or poor credit history, per the report.

“We’d like to see all the financial services come together to look at how to solve that gap,” Tom Lake, director of policy and strategy at Fair4All, told Reuters.

John Cronin, analyst at Goodbody, said the attachment of a zero interest rate to the lending has been controversial because it doesn’t adhere to banks’ credit underwriting standards.

“It will obviously be key that any such lending is underwritten by the government and that the banks are compensated adequately for the operational and other costs associated with the initiative,” Cronin said.

Overdraft usage in the U.K. surged by 7.1% between August 2021 and December 2022 due to the cost of living crisis, as rising food prices and monthly bills put pressure on consumers’ budgets.

Many turned to their overdraft to meet the increased costs amid a 6% rise in essential spend as a proportion of income.

The operating environment for financial institutions has been challenging as well, with their credit portfolios being pressured by increasing interest rates, inflation, geopolitical uncertainty and supply chain disruptions.