After the social fund for emergency loans was cut as a result of the Welfare Reform Act, most authorities have discontinued issuing interest free loans and have replaced them with grants, vouchers and “in kind” support. The Children’s Society says these replacements are inadequate and could lead to families seeking high cost or illegal alternatives. The effect could be families falling into debt and despair.
The social fund used to provide small crisis loans for emergencies and larger community grant for essentials such as furniture. Crisis loans were typically repaid using withheld benefits. Now that funding has been reduced, The Children’s Society has warned that the new schemes may cost more because they are not loans expected to be repaid. As a result of the new law sixty-two percent of councils in England no longer provide interest free cash loans.
High Interest Loans
The Children’s Society further warns that the Reform Act may steer borrowers toward payday loans with high interest rates and even illegal lenders. Payday lenders are gaining favorability with households due to the lack of cash assistance by councils.
Usually cash is the best solution during times of financial uncertainty. Emergency loans help provide for food, heating and electric bills and can help with moving expenses. Extreme financial difficulties push families toward lenders.
The Children’s Society found after surveying the 70 local councils that 18 percent of them issue emergency loans within a few hours of the application being submitted, while 44 percent sent cash to borrowers within 24 hours. The remaining 38 percent took longer for the approval process. Payday lenders, on the other hand, try to achieve an instant process with those in need, eclipsing the services of the councils.
The Reform Act, which led to the cuts in April, has tightened policies on who is eligible for loans in such a way that households can only get local welfare assistance if they have no access to consumer credit. Of the 150 local schemes, many now require that applicants can no longer have any loan lending or family support in order to benefit.