Page last updated at 23:29 GMT, Sunday, 21 December 2008

'No plans' for state loan charges

Man beside sign offering loans
The Lib Dems said the proposal was "harsh and insensitive"

The government has insisted it has no plans to charge interest on emergency state loans to the country's poorest households.

Politicians from all parties had criticised a paper proposing to replace the social fund with credit union loans charging up to 26.8% per year interest.

The Tories accused ministers of acting like "loan sharks".

But work and pensions minister Kitty Ussher said ministers had already ruled out the idea.

The social fund pays out around 500m a year to low-income households unable to access credit from mainstream sources.

Last year, around 1.2 million people - many of them elderly or disabled - used it to cover outlay such as paying for funerals, cots or replacing broken cookers or refrigerators.

The proposal to charge up to 2% a month - the equivalent of almost 27% annually - was included in a consultation paper issued last month.

Work and Pensions Minister Kitty Ussher: 'We are not proposing to charge interest'

The document, signed by Work and Pensions Secretary James Purnell, proposed allowing credit unions to charge "affordable rates" to cover the cost of other services, such as savings accounts and financial advice.

Charging interest would add 47.80 to the cost of the average budgeting loan of 433.30, which would take four weeks longer to pay off as a result, it said.

But Ms Ussher said: "We are absolutely not proposing to charge interest on social fund loans."

She insisted the aim was to make emergency credit more easily available and prevent vulnerable households turning to loan sharks charging as much as 1,000% in interest.

Ms Ussher said that the government wanted to enter into partnerships with local credit unions, which offer loans at interest capped at 2% a month. But she insisted that any state loans provided through them would be interest-free.

It's just driving people who are already in difficulty into even further difficulty
Vince Cable
Liberal Democrats

"We do propose expanding the way that crisis loans work, to make them more available to more people," she said, pointing out that families were currently unable to access loans for "legitimate" reasons such as buying their children Christmas presents.

"We are talking about removing some of the restrictions, as long as people can afford to pay it back," she added.

Shadow work and pensions secretary Chris Grayling had written to Mr Purnell demanding he ditch the "outrageous" plan.

"I just don't understand why on earth the government would come up with a plan like this in the middle of a recession, when unemployment is rising by thousands each week," he said.

"Gordon Brown keeps criticising the banks for charging excessive rates of interest. But when he thinks no-one is looking, he does exactly the same himself. It makes him look like a loan shark."

The people who need it the most will suffer while those who milk the system will not notice a thing
Steve Godrich, Reading

Treasury spokesman Vince Cable told the BBC: "It's completely self-defeating. It's just driving people who are already in difficulty into even further difficulty.

"It's harsh, it's insensitive and it doesn't reflect the needs of the day."

Former Labour leader Lord Kinnock told BBC1's Andrew Marr Show he had no idea where the idea had come from but that it was going nowhere.

"There is no point in doing it, let alone no justice in doing it," he added.

Since the row broke out on Sunday, the government has tried to distance itself from the DWP document and said that poor drafting had given a false impression people could be charged interest on social fund loans.

Have you used the emergency loan fund? Are you considering using the facility?

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