New research into payroll and benefit deduction lending finds that when delivered appropriately the model is good for borrowers, good for lenders and good for employers
One of the things we’re focused on at Fair4All Finance is increasing the availability of affordable credit for people in financially vulnerable circumstances. Community finance providers play a key role in this and have fantastic expertise in serving customers sustainably and ethically.
For many years, credit unions have had payroll partnerships with employers, where loan repayments are made automatically from the borrower’s salary at source. Recently, some have expanded this deduction model to non means tested Child Benefit, which are more commonly known as Family Loans.
While we’d heard many positive stories from borrowers about their experiences of deduction lending like this, there was little in the way of formal research testing the model and its impact on borrowers and lenders.
What was the research?
Working with the Financial Inclusion Centre and the Swoboda Research Centre we heard from over 7,500 borrowers who told us about their experiences with payroll and benefit deduction lending. We also worked with seven credit unions, debt advisors, employers and consumer experts.
We wanted to find out how well deduction lending works for borrowers on low incomes, lenders and employers; where there might be opportunities to improve and grow the offer; and how the model can impact savings behaviour.
What we found was overwhelmingly positive:
- With over 95% satisfaction rates, this form of lending is hugely popular with borrowers
- 7 out of 10 borrowers agreed that this type of lending – when packaged up with a savings element – helped them to save more regularly, even when they had never done so before
- Borrowers felt more confident about managing their money and reported feeling less stressed, anxious, or depressed
- For lenders, fewer loan applications were rejected
- And automatic payments meant lower arrears and default levels
- It works for employers too, improving the satisfaction and wellbeing of their workforce
Overall, the research shows that when delivered appropriately deduction lending can be a credible and effective way of increasing access to affordable credit for lower income households. It offers a scalable solution that can help many more families smooth incomes, meet unexpected costs and start to build their financial resilience.
You can read recommendations from the research in our summary report. We’ve also highlighted the good practice behaviours we saw from the seven credit unions who took part in the research, which should be considered by credit unions delivering this type of lending.
You can also read the full research report for more details on the research and findings.