What is the truth about the Chancellor's plan to launch a no interest scheme based on the Australian model to combat payday loans? It certainly is not what people think it is, it's almost certainly a gimmick.
As a business that operates in the HCSTC "High-Cost Short Term Credit" market. We were of course alarmed to hear that there was this new lending model out there which would put us out of business. On closer inspection, the whole idea is not thought through and as ever it is vacuous in detail. It is little more than a media stunt from the Chancellor. As the Chancellor has named the Australian model as a success story. We've taken a look to see how it performed and hot it will affect others.
Australian Nils Model v HCSTC
First of all, if we analyse at the Australian model. 30.2% of the people who apply for HCSTC in Australia do not qualify for the NILS "No Interest Loan Scheme" and wouldn't be given help anyway. The Australian NILS has an underwriting process that is more stringent than HCSTC lenders. They don't accept people that have a history of defaults.
Secondly, the Australian model does not compete with the speed of normal HCSTC lenders. Applicants need to have an interview, then the decision goes before a Committee. The whole process takes over 7 days to complete.
Third, borrowers can only spend their money on certain things. These include goods such as washing machines, car repairs. They can't pay bills etc. 20% of HCSTC customers cite their reasons for a loan as "holiday" related.
Finally, from the taxpayer's point of view, it is an incredibly bad deal. Data showing 6 months of operating showed that the Australian Nils scheme has a default rate of 10%. Out of 22585 loans, 2228 were about to be completely written off, 568 were already written off. There is no data on late repayments and those in minor defaults. Add to this the costs of administering the schemes and the taxpayer can not possibly win.
Data v Emotion
The data totally contradict the positive emotional - but factually vacant - spin portrayed publically and irresponsibly by politicians and certain Money Saving Experts in the media.
We are unsure as to why they are trying to paint the Australian model as a success. There is no available evidence that borrowers of the NILS don't later go onto applying for an HCSTC loan afterwards. There is no evidence of it having any adverse effect on the HCSTC sector at all.
NILS v Credit Unions
We find it odd that the Chancellor seems to have taken this route, has he abandoned the Credit Union Model? Where does leave them?
Graeme Wingate owner of QuickLoans.co.uk says "HCSTC providers won't lose any sleep over this. It is Credit Unions that seem to have lost favour today. The new scheme seems to duplicate their business model, but undercut's their business pricing and many of them could now go out of business. I'm not sure the Chancellor has thought this through.".