Delivering affordable credit webinar Q&A

Yvette Hartfree, Research Fellow, Personal Finance Research Centre at University of Bristol

Q: Is there any research on, or activity around provision of affordable micro-business loans to support residents to set up micro-enterprises?

Not that I know of specifically, but I think that this is an area CDFIs are involved with.

Q: Has any work been done on looking at the strengths of the Payday lenders/Provident business model and trying to copy and undercut them?

I know of a few examples of this: one study found that to copy the Provident model was expensive to deliver and could not offer ‘affordable’ credit. London Mutual Credit Union cross subsidise their ‘payday’ loan from other products.

Q: Did the Bristol study look at what people needed the loan for? Was it for purchases? Pay off debt? Pay for services - plumber/electrician etc, holidays?

Loans were most commonly used for essential goods - appliances, furniture, car repairs, holidays.

Q: You say ‘evidence was limited regarding whether the take-up of affordable loans replaced tenants’ use of high-cost credit.’ What were the characteristics of those schemes that did successfully support people to shift from high-cost to low-cost credit?

Evidence that schemes replaced use of high cost credit was anecdotal, so from a research perspective we could not conclude that they were successful in this. Anecdotal evidence came from the UK case studies and international evaluation evidence so varied

Scott McKinven, Financial Inclusion Manager, Affinity Sutton

Q: What, if any, permission is required from regulators to venture into the loan market?

All of our schemes are regulated by our partners ie Leeds Credit Union and PfP. Housing associations have an exemption in what they can promote.

Q: 50% engagement - does that mean people engage with some sort of support or does that mean take up of loans?

They engage with support, not just loans.

Elaine Wilkinson, Money Management Advisor, Southway Housing

Q: If there are no credit checks on the small loans, are the repayments recorded anywhere helping build up their credit score?

This loan is intended to engage those who take it up to work with the credit union. They save and borrow with the credit union, which builds up their credit score. Fast turnover was part of the intention of the scheme to compete with pay day lenders.

Ease and speed of application has been one of the most attractive features of the scheme.

Q: What has the take up been for Solutions Loan project?

349 loans over the 20 months the scheme has been running. This averages about 15 loans a month.

Q: With no missed payment penalty, how do you manage to reduce probability of defaulting?

By working closely with the credit union. We have regular monthly meetings to look at those who are defaulting or missing payment.

The Credit Union sends three letters and if ignored go for the DWP deduction from benefits where applicable or those who are serious defaulters are taken to court.

Our default rate is very low and we feel this is because people hope to get another loan in future.  We also know a lot of the applicants through other work and the response to missed payments is very much tailored around our knowledge of their circumstances.

Q: What, if any, permission is required from regulators to venture into the loan market?

You need a Consumer Credit Licence. The Credit Union already has all required by law to lend which was one reason for our partnership with them.

Southway only does the eligibility checks. The Credit Union deals with all applications and processing of loans.

Q: What data sharing agreements are in place with tenants and the credit union to allow sharing of loan default info?

The loan agreement includes a section on data sharing. Applicants sign to agree that the Credit Union and Southway can share information and data. All data by e-mail is encrypted.

Q: What percentage of tenants are accessing the service please?

Approx 5% of tenants.

Q: Hi Elaine. You mentioned that your scheme primarily relies on word of mouth, but that you did do some promotion. Where and when did you promote the scheme to tenants and what were the key things that would be mentioned about the scheme?

We did a promotion in Southway Stories (Tenants newsletter). We took a soft approach, eg. celebrating the anniversary of the scheme, which included information on the loan scheme and comments from tenants on how they used the loan, how easy they found the process and the difference it made to them.

There was a leaflet which focussed on speedy and simple application. Affordable and flexible repayment plans and compared it with higher interest lenders. We sell it as being for ‘home emergencies’ but tenants have used for school uniform, Christmas, car repairs and white goods.

The scheme has been more popular than we first anticipated. Though there is nothing like our scheme, other schemes we looked at seemed to average eight loans per month maximum.  Southway Solutions has averaged 15 loans per month.

Q: Why is your loan a higher interest rate than the rate charged by the credit union?

42.6% (the maximum a credit union can charge) allows the scheme in principle to be self-financing. The interest covers all fees paid to the credit union. The interest however goes into a development fund which is used for joint Financial Inclusion projects. Southway is therefore funding the project (covering the fees) as we want to see the interest used for something positive but we also want to ensure that the scheme would be self funding if we were not able to continue with this support.

We also hoped that tenants would start borrowing from the credit union after having their Solutions loan and be attracted by the lower 26.8% rate. Those who borrow over periods of 12 months or more and make regular repayments can be migrated to a credit union loan at the lower rate. Most however borrow over 34 weeks so it is not worth converting to a credit union loan for the short period remaining as the amount saved would be very little.

We have had busy periods where the capital held by the Credit Union for lending has got very low, however the Credit Union were prepared to use their own capital to cover these very short periods and repayments would soon build funds up again.

Q: How much do you pay to the Credit Union to administer the scheme?

For each application process Southway pays the Credit Union a £30 fee. With the numbers applying, to date fees have been just over £10,000 (for 20 months) so approximately £6,000 per year. Just over £11,000 has been earned in interest over 20 months (into the Development Fund).

The scheme therefore brings in just over what it costs in fees, though some allowance is needed for default.