Iceland's microloan scheme slows lender's website due to demand for interest-free credit

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Earlier in the week, supermarket Iceland launched an interest free micro-loan scheme with lender Fair for You, to help customers manage the cost of living crisis. 

Within a day, demand for the scheme had caused delays on the Fair for You’s website with applications taking an hour to be approved, compared to the site’s usual turnaround time of 20 minutes. 

Throughout the rest of the week, there has been a pop-up warning customers of the slowdown thanks to demand. 

Shoppers can apply for micro-loans of £25 to £75 to be repaid in weekly £10 instalment, interest free. Users are able to top-up credit at six intervals, timed by Iceland to coincide with school holidays, to a maximum of £100 of credit at a time.

Iceland's scheme offers interest-free microloans of £25-£75 provided on a pre-loaded card and repayable in £10 weekly installments.

Iceland’s scheme offers interest-free microloans of £25-£75 provided on a pre-loaded card and repayable in £10 weekly installments.

The not-for-profit-lender has seen demand rise over the past six months as the cost of living crisis has started to take a toll on household finances. 

The Consumer Prices Index rose by 10.1 per cent in the 12 months to July 2022, driven in part by soaring food prices which rose 12.7 per cent in the same period.

Households have also been badly impacted by rising energy prices. New analysis from Citizens Advice shows that a quarter of households won’t be able to afford energy bills in October based on current forecasts. Bills are expected to cost over £4,000 annually in 2023.

Fair for You offers low interest rate loans to customers with poor credit who cannot access financing elsewhere. 

Founded in 2017, it aims to tackle the cyclical problem that those on the lowest incomes pay the most to borrow money.

‘You have therefore this bizarre and totally unfair and unjust situation where the poorest people are paying more for loans than the richest,’ Simon Dukes, chief executive of Fair for You, tells This is Money.

The lender operates via two main schemes, one where customers can access credit to pay for a one-off large household appliance, such as fridge. 

And the second where loans are provided on a pre-paid ‘shopping card’ that can be used at retailers including Argos, Chemist Direct and others that provide day-to day household essentials.

On Wednesday 17 August demand for Iceland's Food Club scheme caused delays on not-for-profit lender Fair for All's website.

On Wednesday 17 August demand for Iceland’s Food Club scheme caused delays on not-for-profit lender Fair for All’s website. 

The Food Club it has launched with Iceland is an extension of this. 

Following a robust regional trial, independent evaluation found 95 per cent of users found the scheme helpful, with 71 per cent less likely to fall behind on rent, council tax and other bills as a result. And there was an 80 per cent reduction in the number of people using loan sharks.

‘We have seen constant demand for our services,’ says Dukes. ‘If anything I think we have seen a slight change in what people are looking for. 

‘Prior to Autumn last year people would be looking to purchase a fridge or a washing machine with us. 

‘We have seen that side of the business reduce and instead now people are looking to purchase with the shopping cart; smaller items and the day to day ones you need every few months.’

The Consumer Prices Index (CPI) rose by 10.1 % in the year to July 2022, driven in part by soaring food prices which rose 12.7% in the same period.

The Consumer Prices Index (CPI) rose by 10.1 % in the year to July 2022, driven in part by soaring food prices which rose 12.7% in the same period.

The trend, he explains, is people now living week to week rather than month to month.

Anecdotally, he adds, over Covid there was slightly more money available to people but now the cost of living plus going back to a more regular living pattern has meant people are less likely to commit to larger items such as washing machines.

What is more people are now taking longer to pay back loans. When possible the team at Fair for You encourages customers to overpay on their repayments in order to pay them off quicker as it helps with longer term budgeting.

Cost of living crisis 

CPI inflation hit double digits in July at 10.1%

Energy bills could expected to hit £500 a month in January 2023

91% of adults reported a rise in their cost of living in June and July 

49% of adults say they are buying less food as a result of price rises

1.2 million families will have to choose between heating and food think tank warns 

Over the past two and three years borrowers have, on average, paid off 12 month loans within six or seven months. 

This has now risen to 10, he says and is expected to increase to 12 next year as the cost of living crisis continues with rising inflation and energy bills.

‘It is an indicator of the pressure people are under,’ adds Dukes. ‘Only thing that might skew it is if people want to pay it off early as they know they will see a new bill coming.’

What is worrying Dukes is the impact of buy now pay later lenders who remain unregulated by the Financial Conduct Authority.

While it is a not for profit lender, Fair for You is FCA regulated and so has to conduct affordability checks on customers before approving an application for borrowing.

Klarna has announced it will open its data to consumer credit reports, but others lenders such as ClearPay are yet to do the same leaving its customers at risk of taking on unsustainable debt.

‘This is my concern with some of the unregulated lenders – it may be that you can afford a loan today but on the 17 November that loan is no longer affordable and that is irresponsible lending in my view,’ he says.

‘When you get applications you need to be asking ‘can that person afford this loan in six months’.’

He is adamant that more needs to be done to improve financial inclusion in the UK to benefit the 14million in the country who currently have no access to affordable finance, and believes dormant asset funding could be one solution.

‘Fair for You has been able to grow its social impact significantly thanks to Dormant Assets funding in 2020.

‘The current cost of living crisis makes the case for investment in financial inclusion even more pressing, and we hope the Government makes the most of this opportunity to improve the lives of those in financially vulnerable circumstances,’ he explains.

The lender argues that additional funding through such funding would enable it to make progress on significantly increasing access to affordable credit and piloting and scaling new financially inclusive solutions such as consolidation loans, fair and affordable insurance.

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