Interest free loans could prevent homelessness and save councils millions, according to new study

A homeless prevention interest free loan scheme in Lewisham – which has helped over 300 families escape eviction and saved the council over £1 million – could be replicated across the UK, according to a new study by the University of Sheffield.  

Research led by Professor Bill Lee, from the University of Sheffield’s Management School, has shown how a grant providing zero per cent interest loans to families at high risk of eviction, who would otherwise be unable to access finance or credit, could play an important role in preventing further additions to the homeless crisis in the UK.

In 2010, Lewisham Council partnered with Lewisham Plus Credit Union – a community-based credit union catering for people living or working in Lewisham and Bromley – to introduce the £85,000 grant scheme in a bid to help these vulnerable people.

The study – published in the journal Public Money & Management and funded by The British Academy – details how, to-date, the scheme has not only saved over 300 families from eviction, but also saved the authority £1 million in costs it would have had to pay in its previous provisions to help these people – including providing temporary accommodation.

Professor Lee said: “Many of the most vulnerable residents are unable to secure loans from high street banks – who typically only lend to financially-secure, low-risk consumers. This means that tenants struggling to pay rent are often forced to turn to commercial payday lenders, who exploit the financially excluded by offering short-term loans at extremely high interest rates.”

According to Professor Lee, one of the biggest benefits of the scheme and using credit unions is that it helps tackle financial and social exclusion. Financial exclusion is when people are denied access to essential financial services that most of us take for granted, such as a bank account or credit card. Social exclusion is suffering deprivation by not having access to a range of provisions – such as a job, money, housing, education and health services – that most other people enjoy.

“While the scheme protected the recipients from homelessness by helping them to address their short-term financial problems, it also opened up loans and savings facilities to them, helping them to save, and establish a credit record,” said Professor Lee.

The findings suggest that credit unions could play an important role in preventing further additions to the homeless crisis in the UK, while saving local authorities money in the process.

“Schemes like this could be rolled out across the country, as many credit unions have high levels of skills in helping vulnerable people manage their very limited finances,” said Professor Lee. 

“However, such schemes need to be underwritten by local authorities or central government, so that credit unions do not carry the burden of loss if people on low incomes are not able to repay the loans.”

In 2018, a study by Shelter recorded 320,000 people as homeless in Britain. According to Shelter’s latest findings, Lewisham is 12th in the UK for the number of homeless people, with one in 49 people in either temporary accommodation or sleeping rough.

“The London borough of Lewisham is in the top 20 per cent most deprived local authorities in England, with one in four people earning less than the Living Wage,” said Professor Lee.

This is a figure which would have likely been far higher, had it not been for this novel system, which has also benefitted housing associations and landlords financially – through receiving rent that would otherwise not have been paid and saving on re-letting expenses, possible repair costs and a void period in rental income before their property could be re-let.

Professor Lee believes such a scheme could be beneficial if rolled out by other credit unions further afield.

“The homeless prevention loans suggest a way forward for other local authorities to work with social housing providers. Social housing providers in Britain are expected to use business management techniques to sustain their own financial position and do not appear to be in a position to establish independent means to enhance the financial security of their tenants.

“Given that there is less legislative pressure on banks to provide basic banking facilities in Britain than is the case in other developed countries the findings reported here indicate that credit unions are best placed to administer such loans.”

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