"This should be welcomed, but there have to be big question marks about whether this can work in practice."
In its Budget documents, the government said that "for some people, even borrowing from social and community lenders can be unaffordable".
It will partner with debt charities and the banking industry to provide interest-free loans to those on low incomes.
The government claimed a similar scheme in Australia has had widespread success, helping four out of five of those who took a no-interest loan to stop using payday loans.
However some questioned how the scheme would work in practice and how lending would be subsidised.
Richard Lane, director of external affairs at StepChange, commented: “Having campaigned for years for a no-interest loan scheme, we’re looking forward to working with the government and the banks to bring it to life. Over a million people turned to high cost credit last year to meet basic living expenses, which is counterproductive both for households and the economy.
"If finances are tight and your fridge breaks down, the last thing you need is expensive credit - what you need is simply a replacement fridge. By taking away the additional high cost of borrowing, the new scheme will demonstrate how no interest loans can act as a realistic and better alternative to short term high cost credit. It can only be a good thing to reduce the risk of households building up problem debt as a result of trying to meet their basic needs.”
Greg Stevens, CEO of the CCTA, said: "This should be welcomed, but there have to be big question marks about whether this can work in practice.
"It sounds like this 'zero interest' pilot is based on the Australian Good Shepherd scheme. The Australian scheme is very small scale — it's been going 36 years but only lent 27,000 loans in 2017. This is minuscule compared to even the smallest commercial lenders over here.
"Also, those 27,000 loans in Australia are likely to be the least problematic in terms of default and bad debt — once you start getting up to scale, these problems inevitably multiply.
"The reality is that, as with all not-for-profit, social or subsidised lending schemes, this new scheme from the Government will run headlong into all the same challenges that commercial lenders face every day: customers who want only small loans over short periods (which vastly increases the unit cost compared to larger, longer-term loans), high levels of bad debt, very high loan-servicing costs.
"The only way to bring the cost down is to subsidise the lending. The Government can either do this itself, or it can get the banks to do it. We understand the banks have been asked to support this scheme by making platforms available and providing capital funding. It’s for the Chancellor and the banks to report on how well that’s going, but the rumour is there’s a lot of reluctance being encountered.
"Subsidising the cost of lending is one thing, but you also need the right systems to manage a complicated loan book with all sorts of social issues mixed in. This requires a lending model designed around what customers actually do (not what campaigners wish they would do); and it requires professionalism. This is why credit unions habitually fail despite millions in public subsidy every year — the product design is wrong, the systems are sub-standard and they lack professionalism."
