The 2018 budget is being released today by the Chancellor of the Exchequer, Phillip Hammond, and a lot of it aims to help those who have found themselves with long-term debt.
Phillip Hammond is set to unveil a plan to solve problem debt, helping those trapped in debt which has been caused by payday loans and other forms of high-cost credit. To help people who have found themselves in such a situation, the government will be exploring the idea of zero-interest loans which will be lent out to aid people in paying back their original debt. Essentially, the scheme being introduced is designed to help people escape the cycle of debt that some lending practices have promoted.
This introduction is much to the delight of campaigners and debt charities, who have worked for years to push for a solution to the cycle of debt which can come as a result of unfair lending and the persecution of those who are low income.
MoneySavingExpert founder, Martin Lewis, welcomes the idea of such a scheme after years of advising people on low incomes not to seek the services of high-cost lenders unless they are sure they can pay it back without having to take out a new loan just to do so.
However, Shadow Chancellor John McDonnell was rather critical of the government reminding people that this government had introduced Universal Credit which, he says, resulted in making low-income households falling into debt. He said, therefore, this is “farcical” coming from the Conservative government.
The fact that these new loans will be zero-interest is the key as to how they are going to help people who have been struck down with long-term debt or low-income households who have fallen victim to high-cost credit.
The way loans work usually is that you borrow the amount agreed between you and the lender which you will pay back. However, there is a charge for the act of lending which is known as the interest rate. The interest is what catches people out when they are trying to pay back their loan as the interest rate of payday loans is often rather high. As a result, many borrowers have to take out a second loan just to pay back the first loan with interest and, this can continue as a cycle.
As these loans will have no interest, people who are struggling to shake their debt can use them and pay them back at face value. This means that they will likely be able to pay them back without falling victim to spiraling debt.
This scheme aims to help people find their way out of debt, and many believe this is a great solution. However, some do not think it far enough and urge the government to make a solution that would stop people getting to this stage of debt anyway. Labour MP Stella Creasy, believes that there should be an interest-rate cap on all forms of borrowing – this, she says, would prevent people from needing to take out the loan which is being proposed by Phillip Hammond.