Questions and answers

Q. Will people still be able to access Growth Fund loans after Financial Inclusion funding ends on 31 March 2011

A. Funding of up to £73 million has been announced for the modernisation and expansion of third sector organisations and their services. The previous financial inclusion Growth Fund will end on 31 March 2011 as planned. We are replacing this with a new credit union modernisation and expansion fund, which will be used to extend contracts with credit unions and other community finance providers for six months from April 2011 whilst the feasibility of further credit union modernisation and expansion is tested.

Q. £80 million in total has now been allocated from the Financial Inclusion Fund – do you see this as enough, and what happens when the money runs out? If you were serious about the benefits this Growth Fund can make to local communities surely you would have allocated more money?

A. In December 2007 HM Treasury published an action plan for financial inclusion covering the period 2008 to 2011.  This action plan is backed by £135 million of funding, and £38 million of this money has been allocated, in addition to the initial £42 million, to further increase consumer access to affordable credit through credit unions and other third sector lenders and extend coverage to red alert areas where supply of affordable credit falls far short of demand. So yes, the Growth Fund, and the repayments generated on the loans made, will be sufficient and yes, we are very serious indeed about the need to generate a sustainable service in the long term.

In the Budget 2009, the then Chancellor announced an extra £18.75 million for the Growth Fund, bringing the total to almost £100 million.

Credit unions have made great progress in recent years in bringing affordable financial services to people who would not otherwise be able to access them.

Building on the Growth Fund the Department for Work and Pensions will continue to support credit unions for four years through a new expansion and modernisation fund of up to £73 million. The new fund will seek to extend access to basic, appropriate financial services to many more people on lower incomes, through modernising delivery and customer support systems so that credit unions can become financially sustainable.

Q. Why are you loaning money to those who are the least likely to be able to afford the repayments? Aren’t you encouraging them to get into debt?

A.One of the principal causes of debt for those on benefits or low incomes is that the majority have little or no savings – when unexpected financial pressure occurs, they have to borrow.

The Department is helping people avoid unmanageable debt in the first place through organisations like credit unions and other community financial institutions. These offer affordable financial services to people who would otherwise be unable to access them – helping people to:

• save
• open bank accounts
• pay off debts, and
• learn to manage their finances.

We are giving them access to affordable credit, rather than the spiral of unaffordable debt.

Q. And in trying to make the repayments won’t customers run out of money and end up claiming Crisis Loans from the Social Fund?

A. Credit Unions and other community finance organisations make affordable loans available to those who have demonstrated their ability to budget and are likely to be able manage the repayments.

Q. But their circumstances might change and they run into problems. Will they be able to reschedule the loan?

A. Repayment of each loan will be a matter for discussion between the borrower and the lender, and this is something the borrower would need to discuss with the lender prior to taking the loan.

Q. Isn’t this a disincentive for people to come off benefits?

A. No. Anyone wishing to borrow money, regardless of their type of income or benefit status has the opportunity to apply for a loan from third sector lenders. The lending institutions will be free to consider loan applications against reasonable credit-worthiness criteria, and to refuse loans to people whose circumstances indicate they will be unable to the make the repayments.

Q. CUs and CDFIs will expect to be repaid on their terms – won’t this mean that they are harassing people who are already vulnerable?

A. These not-for-profit organisations play a key role in the provision of affordable loans, and are active in providing money advice to those on the lowest incomes without encountering difficulties with repayments. However, they need a larger capital base in order to grow and become sustainable.

The new fund will seek to extend access to basic, appropriate financial services to many more people on lower incomes, through modernising delivery and customer support systems so that they can become financially sustainable.

Q. What do people do now to fulfil their credit needs?

A. Those who have a poor credit rating, or a history of bad debt, have to turn to expensive, and sometimes illegal, lenders. The most respectable of these institutions provide similar credit products as those in the mainstream sector but at a much higher rate of interest. The least respectable charge similarly high interest rates, tend to cater for those with bad debt histories, and appear to target vulnerable people and encourage them to get into further debt.

Those on low incomes turn to the alternative credit market to fulfil their credit needs. Borrowers therefore use doorstep lenders, pawnbrokers, mail order catalogues, and sometimes illegal money lenders to help them make ends meet or to allow them to make larger household purchases.

A typical APR from a lawful home credit company is 272% with others charging much more.

Q. Will financial advice will be provided at the time a loan is applied for?

A. A number of credit unions (CUs) provide assistance to people who need money advice or who are struggling with existing debt repayments. Some appropriately qualified and licensed credit unions provide assistance themselves while others have entered into partnerships with local agencies to ensure members get the specialist help they need.

CUs may also be able to offer members products designed to help people gain better control over their finances. Members may be advised on their account options, such as a Budgeting Account which has a bill paying service (useful for members who choose to pay in a fixed regular amount which is then used to pay agreed household bills on the members behalf), an account that is suitable to receive DWP benefits and pensions by Direct Payment, and a Savings account.

Q. How do people apply for a loan?

A. People who need a loan should contact their nearest credit union or community development finance institution. They will be asked to complete an application form, which outlines how much they want to borrow, and what they need the money for. They will also be asked to provide information about the money they have coming into the household, and what they spend on living expenses (e.g. rent, electricity, food etc). There will be an interview to determine their ability to budget to make repayments, and they will be given a full explanation of their responsibility for keeping up with repayments.