The end of interest free loans in an emergency?

The Children’s Society today releases a key report, Nowhere to Turn? Changes to Emergency Support. This paints a disturbing picture of how vulnerable children and families in financial crisis could pay the biggest price for government changes to the Social Fund.

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By Dr Sam Royston, poverty and early years policy adviser at The Children’s Society

The Children’s Society today releases a key report, Nowhere to Turn? Changes to Emergency Support. This paints a disturbing picture of how vulnerable children and families in financial crisis could pay the biggest price for government changes to the Social Fund.

As part of the government’s moves towards increasing the responsibilities of local authorities, Community Care Grants and Crisis Loans were abolished in April this year. Support for delivering replacement ‘Local Welfare Assistance’ schemes was given to councils in England and the devolved governments in Wales and Scotland.

What were Community Care Grants and Crisis Loans?

Community Care Grants and Crisis Loans were both administered by Jobcentre Plus. Community Care Grants were non-repayable grants to help people to live independently in the community, or to ease exceptional pressures on families.

Crisis Loans were interest free loans to help people with immediate short-term needs in a crisis. We give the example in the report of a father who claimed for help to pay for several days food and fuel because the last of his money had had to be used to pay for travel costs for getting his son to an urgent hospital appointment.

It seems obvious, but one of the crucial aspects of Crisis Loans was that since they were loans, claimants had to pay them back. This both ensured claimants take financial responsibility, but also made the scheme partially self-financing.  Since loans could be recovered directly from claimants’ benefits, this helped to ensure that they were paid back, without going through complex and expensive debt recovery.

In 2011/12, around £150 million was recovered in crisis loan repayments, which went into funding the system the following year. This meant more money was available for those most in need.

What’s happened to emergency loans with the changes to Local Welfare Assistance?

Most replacement schemes have shifted from providing interest free loans to providing grants – often in the form of “benefits in kind”,  such as vouchers for food or furniture.  In fact, we found that only around a quarter of replacement schemes are providing credit to replace Crisis Loans. This means that in many areas, there will no longer be access to interest free loans to support families and individuals in crisis.

Even in areas where loans are being provided through local schemes, they are often being provided through credit unions that usually offer relatively low interest, rather than interest free loans.

The Children’s Society is concerned that the loss of this crucial form of interest free credit will mean that families turn to high interest lenders instead. This comes at the worst possible time. A recent Which? survey found that one million households are using payday loans each month – including four in ten using them for essentials like food and fuel.1

Furthermore, some local authorities have said that their support scheme will not be available to claimants who have access to credit.  For example, one area notes on their website, that:

“In deciding whether to make an award we will have regard to the applicant’s circumstances including… any sources of credit such as cash cards, store cards, credit cards, cheque cards, cheque accounts, overdraft facilities, loan arrangements”

We don’t want to see the move from Crisis Loans to Local Welfare Assistance become a move from a hand-up to a hand-out. We believe that local authorities need to make it a priority to support families with the provision of interest free credit to help them in a crisis, and also ensure that they aren’t using access to commercial credit as a reason to refuse support.

Our report recognises the difficult position local authorities have been put in, with greatly reduced budgets to deliver these schemes, (the money given to them to provide the replacement schemes has almost been halved since 2010), making it extremely hard for local authorities to provide effective support.

We want to see the government do more to support local authorities.  For example, by providing centrally administered support to enable local authorities to make interest free loans for emergency support a key part of their schemes, with money repaid through benefit deductions.

Getting interest free credit in an emergency will not only mean that families are not pushed into the arms of high interest lenders, but it will also ensure that money is repaid, which can be used to ensure more families receive the help they desperately need.

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