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The government is to explore the idea of zero-interest loans to help the millions of people trapped in a cycle of problem debt caused by borrowing from high-cost providers such as payday lenders.
Campaigners welcomed the development, which will be unveiled by the chancellor, Philip Hammond, in the budget on Monday, but they called on the government to go further to protect low-income households from exploitative lending practices.
The Labour MP Stella Creasy, a prominent campaigner against payday lending, urged ministers to go further by introducing an interest-rate cap on all forms of borrowing, which she said would help prevent people from running into financial trouble in the first place.
“Waiting for people to get into problems when we know what prevents them is not only cruel, it’s much more costly for all concerned,” she said.
Carl Packman, the head of corporate engagement at the Fair By Design campaign, a charity that examines the impact of high-cost credit, said: “We also need the chancellor’s plan to be coupled with an extension of price caps on other forms of credit like rent to own products and overdrafts.”
Hammond is expected to reveal details of the scheme alongside other flagship tax and spending plans in the budget. The government is also expected to open a consultation with debt charities and the banking industry on providing the interest-free loans.
The Treasury believes that such a scheme could tackle the issue of problem debt for the 3 million or so people in Britain who borrow from high-cost providers such as payday firms and credit card providers.
By helping low-income families with a more affordable alternative, it would also remove the pressure on them to borrow from illegal loan sharks. The government said a feasibility study would be conducted next year to examine how a pilot could work in Britain, after the success of a similar scheme in Australia.
The Treasury says the Australian scheme helped four out of five of those who took a no-interest loan to stop using payday loans.
It said it would also extend the “breathing space” people get to put their finances in order from six weeks to 60 days, and launch a £2m fund for technology entrepreneurs to create products to make it easier for people to borrow from affordable lenders.
Despite the broad welcome from debt campaigners, the measures are likely to raise some eyebrows, given that the government’s austerity measures have tended to push more people towards high-cost credit.
Campaign groups believe the introduction of universal credit and cuts to benefits since the Conservatives entered government in 2010 have increased the chances of households falling into problem debt.
Wonga, the poster child of the payday lending industry, collapsed this year, but campaigners say tough economic conditions are forcing more people to take out high-cost loans.
About one in seven people across Britain borrowed money to meet a household need last year, according to the StepChange debt charity, with around 1.4 million resorting to high-cost credit.
The Bank of England has become increasingly concerned about rapid growth in personal borrowing on credit cards, loans and car finance, which has returned to levels last seen before the financial crisis.
British households spent about £900 more on average than they received in income last year, the first time people spent more than they earned since the start of the credit card boom in the 1980s.
Economists have blamed cuts to benefits, lacklustre wage growth and higher levels of inflation since the EU referendum two years ago.
John McDonnell, the shadow chancellor, said: “This is farcical from a government that has overseen the expansion of high-cost problem credit on an industrial scale, and whose flagship social security policy, universal credit, is driving low income households into debt.”
