A not-for-profit lender was launched today to give low earners and those with poor credit histories an alternative to loan sharks and doorstep cash providers.
My Home Finance, unveiled by Secretary of State for Work and Pensions Iain Duncan Smith, will offer those financially excluded access to credit (see the Cheap Loans guide).
It will lend eligible borrowers, who have had a face-to-face interview, relatively modest sums of around £500, to help buy everyday items such as school uniforms, a washing machine or furniture (see the Benefits Check-Up guide).
People will repay the money weekly and will be charged 29.9% interest, far lower than the typical 200% APR they would be charged by a doorstep lender, or rates of 2,000% typically charged by loan sharks.
While this is still much higher than the sub-10% rates available to mainstream borrowers, as it will be repaid over a far shorter period, the true cost will be less. If you borrow £500 over three years at 10% it costs £80 in interest. At 29.9% over a month, it will cost £12
Customers will also be given debt advice and help opening a bank account, to encourage saving.
The group, run in partnership with the Department for Work and Pensions, Royal Bank of Scotland, 26 housing associations and the Wates Foundation, will be one of the largest not-for-profit financial service providers in England.
It plans to open 10 branches across the West Midlands, which has one of the highest levels of unemployment in the UK, by the end of October.
The branches will be located on high streets and in shopping centres.
More branches planned
If the pilot is successful, My Home Finance will open branches across England, with plans to advance 150,000 loans to low earners during the next 10 years.
Branches are now open in Hereford, Worcester, Walsall and Northfield, in south Birmingham; with further hubs planned for Coventry, Tamworth, Dudley, Wolverhampton, Birmingham city centre and Erdington, in north Birmingham, by the end of next month.
David Orr, chief executive of the National Housing Federation, says: "My Home Finance will provide an affordable, convenient and trusted option for people on lower incomes looking to build up 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."
Around 2.5 million people currently borrow from doorstep lenders, while an estimated 200,000 are thought to have turned to loan sharks.
Launching the scheme at the National Housing Federation's annual conference in Birmingham, Duncan Smith said: "It is great to see new ideas coming through to help the poorest in our society access credit and advice on how to avoid unsustainable levels of debt.
Further reading/Key links
Borrow for less: Cheap Loans, Slash Existing Loan Costs, Cheap Credit Card Loans
Get help: Debt Problems, Mortgage arrears, Benefits Check-Up, and Redundancy guides