Learning from our No Interest Loan Scheme proof of concept

Early indications suggest NILS loans are providing a vital financial cushion for people unable to access or afford existing forms of credit

We’re making good progress on rolling out the UK wide No Interest Loan Scheme (NILS) Pilot with Fair By Design and Toynbee Hall. Following a period of market engagement and a full tender process we’ll be announcing the delivery partners soon.

In the meantime, we’ve been running a small proof of concept pilot with South Manchester Credit Union which is providing us with some valuable early learnings.

Why NILS?

For the millions of people in financially vulnerable circumstances, a small sum of money can make a big difference. By offering a way to spread essential or emergency costs, no interest loans will provide a vital financial cushion for people unable to access or afford existing forms of credit, but who can afford to repay small sums.

The pilot will deliver no interest loans to people in vulnerable circumstances across the UK. It will test the benefits to customers, society and the economy and show whether a permanent nationwide NILS can be delivered in a sustainable way.

Proof of concept

Since January, South Manchester Credit Union have been offering small no interest loans of between £100 and £2,000 to customers who weren’t eligible for an interest bearing loan.

A key principle of the scheme is to only offer a no interest loan where there is a benefit to wider society and the need can’t be covered by a grant or other support.

Customers can be eligible for a NILS loan where they are declined for an interest bearing loan due to affordability reasons, but removing the interest makes the loan affordable. Or where they have been excluded from access to credit but the lender believes their circumstances have changed, meaning their credit score should not be a barrier to lending.

So far the average loan value has been £490 with reasons for loans ranging from paying for driving lessons and upfront nursery fees to enable customers to get back in to work, to funds for housing deposits and to buy school uniforms, essential furniture and white goods.

87% of applicants have had poor or very poor credit scores, yet as at the time of publication 94% of repayments had been met. Customers are receiving wider support from the credit union to help with the circumstances that they’re in.

Findings from case studies

South Manchester Credit Union have been recording case studies of each of their NILS customers and we’ve included some of these at the end of this article.

As well as highlighting the difficult circumstances many people find themselves in, they reveal some common themes:

• Lots of customers are recovering from previous financial problems and subsequently poor credit scores
• With a NILS loan in place and support to consider their wider financial position, many are back on track and paying off their historic debt which had affected their affordability and eligibility for an interest bearing loan
• NILS loans are helping people in vulnerable circumstances manage life events like ill health, relationship breakdowns and bereavements – getting them back on their feet through being able to furnish their house or finance a return to work

More broadly they also show the importance of responsible and thoughtful lending that goes beyond just offering a loan and the important wraparound support provided by community finance providers like South Manchester Credit Union

The view from South Manchester

We spoke to Sheenagh Young, Chief Executive at South Manchester Credit Union, about her experience of the proof of concept so far:

‘Many of our customers find themselves in difficult circumstances and we offer a bespoke, human response. We see our job as helping people find the right solutions to their problems, making sure they only borrow what they can afford to repay and considering their wider situation, for example by signposting people to other local organisations who can provide support.

‘We know that a safe line of credit at a critical time of stress or change in a person’s life can help them clear the hurdle and create a loyal connection. This is reflected in the encouraging rates of repayment to our credit union and members regularly tell us how belonging to their local credit union brings financial confidence and peace of mind.

‘What I like most about NILS loans is that they give us somewhere else to go for customers we’ve previously had to turn away. It’s had a positive impact on our overall decline rates, which have been reduced by a third. The scheme has enabled us to go the extra mile with customers who can now access a more positive approach to personal finance.’

Taking lessons forward

Learnings from the proof of concept will play a key role in refining product and process design with the delivery partners and Fair By Design, ahead of the wider pilot rollout later this year. We’ll also feed in insights from customers with lived experience as part of this work and will be running customer workshops over the summer to test the NILS products.

During the pilot lending period we’ll continue to learn as we go, with three waves of lending planned to allow time to learn from customers and lenders, iterate the product and monitor bad debt.

And we’ll be working with Toynbee Hall to conduct a process and impact evaluation throughout the pilot. This will be designed with an independent academic evaluation partner and informed by customer feedback along the way.

While there’s still a long way to go on the NILS journey, we’re encouraged by the positive early signs from the proof of concept and look forward to sharing more about the pilot as it develops.

Customer case studies

Safia (not her real name), 32, single mother of two young children

Safia was due to start a new job after a period of being unemployed and needed to place her children into a nursery.

While she was eligible to get the fees reimbursed, she needed a loan to cover the upfront payment required by the nursery.

The initial application screening showed she wasn’t eligible for an interest bearing loan, but she could afford to pay the loan principal without interest. South Manchester Credit Union were able to offer her a £350 no interest loan to cover the fees and she is now back working and paying off her loan.

Megan (not her real name), 29, single mother of four

Megan previously struggled with her finances and has since got them back on track with the credit union. She is now paying back her existing balances and saving consistently.

She recently returned to work after a substantial period of time off due to a long-term health condition and desperately needed a car to get there.

Despite clearing some of her larger historic debt, her previous financial struggles have left her with a very low credit score. South Manchester Credit Union were able to offer her a £2,000 no interest loan though and her payments remain on track.

Zainab (not her real name), 43, mother of three

Zainab came to the credit union having moved into a new property as a victim of domestic violence. The new property was largely unfurnished and she needed a loan to buy carpets, beds and bedding for her children.

Her credit report was impacted by recent defaults for utility providers though, caused as a result of her fleeing her previous property.

Her income was limited too, but South Manchester Credit Union were able to offer her a smaller £300 no interest loan to get the carpets fitted. They also referred her to some local organisations to help with the beds at a cheaper cost.