Borrowers who are normally forced to seek exhorbitantly expensive credit from door step and pay day lenders will be offered a cheaper source of borrowing by the government and the National Housing Federation from today.
Work and pensions secretary Iain Duncan Smith is launching a new loan scheme for people who are financially excluded by the high street banks because they have a poor credit record or are on a low income.
The scheme My Home Finance, run in collaboration with the Royal Bank of Scotland, 26 housing associations and the Wates Foundation, will provide loans charging a typical APR of 29.9%, comparing very favourably to the rates charged by doorstep and pay-day lenders, which can range from 200% to 2,000%. Loans of around £500 will usually last for a year, but borrowers can select a shorter or longer term if preferred.
My Home Finance will start with 10 branches across the West Midlands by the end of October, and will roll out to the rest of the UK from next April if successful, writing up to 150,000 loans to people on lower incomes over the next 10 years. The branches will be located in busy high streets and shopping centres, providing easy access to those who have previously been turned away by high street lenders.
The West Midlands has unemployment levels among the highest in the UK and the National Housing Federation says the area is in particular need of affordable credit, access to bank accounts and money advice. Branches have already opened in Hereford, Worcester, Walsall and Northfield, south Birmingham. By the end of October, further branches will have opened in Coventry, Tamworth, Dudley and Wolverhampton, and in Birmingham city centre and Erdington, in north Birmingham.
Around 2.5 million people borrow from doorstep lenders at rates often in the region of 272% for new customers. A further 200,000 are estimated to borrow from loan sharks. A majority of those financially excluded are social housing tenants.
Dixon Erroll, a cleaner from Birmingham who has three or four part-time jobs and a history of missed loan payments, is borrowing £1,000 from My Home Finance to pay off two payday loans totalling £800 which cost him £200 a month to renew. He will be paying an interest rate of 16% APR over one year to repay the £1,000 loan.
He said: "I've dealt with doorstep lenders in the past, and payday lenders now, and they are robbers. My Home Finance are very fair to deal with, and the loan will be repaid after 52 weeks so you know exactly where you stand."
Loan payments will be made by direct debit: My Home Finance will help those who don't already have an account open one with the Royal Bank of Scotland.
Itisam Akhtar, office manager for the Birmingham branches, said that each case would be judged on its merits: "If they've got a recent entry on their credit record, we need to look at that with a bit of caution. We will have a chat with the customer – we know what questions to ask. But we can't dismiss them out of hand – that would undermine the whole purposes of the scheme."
David Orr, the federation's chief executive, said: "My Home Finance will provide an affordable, convenient and trusted option for people on lower incomes looking to build up their savings and borrow modest sums.
"By offering fair loans at fair prices, we hope to offer an alternative to both loan sharks, who cynically prey on hard-up families, and doorstep lenders, who are all too willing to lend cash to the desperate at hugely inflated rates of interest.
"This ambitious not-for-profit sustainable scheme shows the determination of the housing association sector, the government and RBS, to help financially excluded consumers to join the financial mainstream by saving and borrowing in a fair and responsible manner."
Malcolm Hurlston, chairman of the debt advisory charity Consumer Credit Counselling Service, welcomed the launch of My Home Service, but said that given the limited number of loans the service was intending to make, it would not replace doorstep lenders and payday loans.
He also questioned the wisdom of collecting payments by direct debit, pointing out that although this has enabled the service to keep interest rates low, lenders in the the high risk, "sub prime" market have previously said that regular face-to-face contact with borrowers was necessary to ensure payments were made. "Although paying by direct debit will keep the costs down, it could be a weakness as well," he said.
sources: guardian.co.uk
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