MSE News

New Government-backed interest-free loan scheme to be rolled out across the UK from September – here’s how it works

If you've been rejected from borrowing you may be able to get a one-off interest-free loan from a credit union or alternative lender from September. A new Government-backed pilot scheme is designed to help people struggling to borrow, and will lend anything from £100 to £2,000. You can't apply directly but read on to find out how the scheme works.

In the meantime if you're struggling with debt and need help now, see our Debt Help guide. Alternatively, if you're considering applying for a standard loan see our Cheap personal loans guide for our best buys.

20,000 borrowers will initially benefit, with plans to roll out the scheme further 

The so-called "No Interest Loan scheme (NILs)" was successfully trialled in Manchester earlier this year, and will be rolled out to 20,000 vulnerable people across the UK from September (we've asked if there's an exact date and we'll update this story when we know more). If this wider roll out is successful and extra funding is secured, the scheme will open to a further 500,000 borrowers every year after an initial two-year period. 

Loans will be administered in practice by credit unions and other lenders but the scheme itself is backed by the Treasury and part run by Fair4All Finance, which helps increase access to fair and affordable financial products and services.

The scheme will be funded with £3.8 million from the Treasury, £1.2 million from lender JP Morgan Chase, and up to £1 million from each of the UK's devolved Governments. In England, Fair4All Finance will add an additional £1 million to the pot. 

Initially borrowers will need to be referred to the scheme - they can't apply

Eligible borrowers will need to be referred to the scheme through housing associations, credit unions, or via lenders that have agreed to work with Fair4All Finance on the programme. 

Borrowers will only be eligible if they have already applied and been rejected for an interest-charging loan elsewhere. These lenders or credit unions may then offer borrowers a no-interest loan instead (should they be eligible and should the company be signed up to the scheme).

There won't immediately be a way for people to apply themselves, but this may change after the pilot.

You’ll receive the loan in one lump sum - amounts will vary between £100 and £2,000

Borrowers can get between £100 and £2,000 under the scheme, with the average amount expected to be lent being £500. 

How much you'll receive will depend on the amount you originally applied for from other lenders. What you're offered under the scheme will most likely be the same amount, though this will depend on your situation and ability to pay it back.

You should receive your loan about two days after applying (once you've been successfully referred to the scheme) and it will be sent via bank transfer as a lump sum. You can only ever take out one loan under the scheme – you won’t be able to borrow again.

Loans are expected to go towards paying for items, such as fridges and freezers, or to cover the cost of sudden events such as funerals.

You can repay loans in monthly or weekly increments by bank transfer

You'll be able to repay the loan via bank transfer in either weekly or monthly increments over the course of six to 18 months. The average time Fair4All Finance expects loans to be repaid is 12 months. How long you pay the money back, and how much your weekly or monthly repayments are set at will be decided by your lender, which will conduct an affordability assessment upon application.

If you choose to pay your loan back weekly, you’ll start paying it back a week after receiving it. If you choose a month, then you’ll begin paying it back a month after receiving it.

'Payment holidays' are available if you can't meet repayments

If something unexpected happens, which means you can't meet your repayments, you will be allowed to take a 'payment holiday'. How this will work depends on the lender and your personal circumstances - you'll need to contact your lender to find out.

If you haven’t been able to pay the loan back after 18 months from receiving it, which is the maximum time offered, the lender will decide what to do next. Action varies from lender to lender but in most cases a payment plan will be set up - we have asked if there's any scenario where borrowers will be charged interest after 18 months and we will update this piece when we know more. 

Any payments made after the 18 months will not incur interest but it isn't clear if the no-interest loans - and any subsequent missed payments or repayment plans - will affect your credit score.

Fair4All Finance is currently working with credit ratings agencies to ensure this pilot does not impact a borrower's credit rating or go on their credit file. It said the only time it would expect the no-interest loans to go onto a customer's credit file is where there are late payments - excluding those where a payment holiday has been arranged.

Carefully consider if a loan is your only option

If you NEED to borrow, loan rates are currently close to the lowest we've ever seen. Yet, don't borrow on a whim – only do it for planned, budgeted spending – and borrow as little as possible, repaying as quickly as you can.

If you need a loan now and don't think you'd be eligible for the interest-free scheme, use our loans eligibility calculator to see how much you could get. Using this tool won't leave a mark on your credit file. Our Cheap personal loans guide also offers tips on what to do if you feel you need to borrow. The best-buy loans featured are not interest-free though. 

You can also speak to a Credit Union as these may already offer loan options that aren't available on the high street. Alternatively, you can check if there's a local community developed finance institution in your area, which may be able to help. 

For some, a formal debt solution – such as bankruptcy, an individual voluntary arrangement or a debt relief order – may be the only solution. These are not steps to be taken lightly though, and you should ALWAYS seek free debt advice first. See our Debt problems guide if you are struggling. 

MSE weekly email

FREE weekly MoneySaving email

For all the latest deals, guides and loopholes simply sign up today – it's spam-free!