These interest-free loans have a twist: Pay off on time and you might get money back

Living in poverty has insidious effects, not least a spiral which makes it ever-harder to access credit. But a new idea is offering donors the chance to finance a scheme which allows those on low incomes to afford essentials and rebuild their credit score at the same time. And there’s a twist: Pay back on time, and some of the debt might be written off.

Building on the Iceland Food Club, the Giving4Living pilot uses money donated through Crowdfunder to incentivise on-time repayment of interest-free micro-loans of up to £100.

When the Iceland Food Club scheme launched in 2022, it gave customers the ability to pay for essentials without going to loan sharks – in the form of pre-payment cards financed by ethical lender Fair for You. Now, after a pair of pilots, the brains behind the scheme want to take it further.

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With their new idea, a certain number of those who take out loans will be told the last bit of the loan will be written off if they stick to repayments

“It’s giving people a helping hand, not a handout,” said Simon Dukes, CEO of Fair for You. “What a great incentive for somebody to then find the last £20 has been paid off and they can use that for something for the family, or perhaps something they haven’t budgeted for that happens.

“These necessities are not available to millions of people simply because they have poor credit scores,” Dukes added. “The way our financial system works, it prejudices against these people.”

Amid the cost-of-living crisis, families living on low income turned to debt to make ends meet. A fifth of low-income families took on new lending to pay essential bills, found research by the Joseph Rowntree Foundation. The cost of servicing this debt worked out at £680 per household.

A pilot in January last year helped about 1,000 people, Dukes said, with those chosen for a write-off using the “extra” money to pay for purchases including a kids’ school trip, a treat for the family, or an electricity bill.

Like the Iceland Food Club, it is timed for the start of the school holidays, when those on low incomes find themselves under extra financial pressure. Extra loans can only be taken out – up to a maximum of six times a year – after the previous cash has been paid back.

“It helped people to budget, therefore it gave people a bit of a boost at the end of their loan,” said Dukes.

Borrowers are only told they have been chosen for a write-off once they have taken out the loan, said Dukes: “We don’t want to incentivise people to take out loans they can’t afford or don’t need”.

But he said it filled a gap left by conventional finance: “Millions of people, through no fault of their own, are unable to get easy, affordable, responsible credit that the vast majority of people take for granted.” 

Fair for You, which has been supported by the Big Issue’s social investment arm, Big Issue Invest, also assesses people to make sure they are only loaning to people who can afford to pay it back in the first place.

“We will only lend to somebody if we know they can pay back,” said Dukes. “The people we serve, our customers, have very low incomes, we’re looking at the lowest decile of income in the UK. A lot of people we serve, their incomes are erratic.”

After two trials, Dukes said he was eager to expand the scheme, targeting £20,000 of donations to help another 1,000 people. 

Because the loans are made on pre-paid cards, it would be possible to give donors a glimpse of the purchases they are facilitating, Dukes added. Feedback had been positive, but he was eager to collect more.

“The whole point around this is that the people we’re seeking to help genuinely find it helpful.”

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