Government deny social fund interest claims

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The Government today denied that it is considering charging interest on loans offered to some of Britain's poorest families to help them through household financial crises.

Reports today suggested that people on benefit accessing the social fund loans could be hit by interest rates as high as 27% under proposals being considered by the Department for Work and Pensions.

Conservatives accused the Government of behaving like loan sharks, with shadow cabinet member William Hague branding the idea "astonishing and outrageous".

But work and pensions minister Kitty Ussher said the Government was "absolutely not" proposing charging interest on loans from the fund, which currently pays out £500 million a year.

She said that ministers were considering involving credit unions in the distribution of the loans. But while credit unions are permitted to charge interest of up to 2% a month on their own loans, they would not be allowed to do the same with Government products.

Ms Ussher told BBC News Channel: "We are absolutely not proposing to charge interest on social fund loans. I think that would be the wrong thing to do.

"We do propose expanding the way that crisis loans work, to make them more available to more people, but we are not proposing charging interest.

"I think the confusion has arisen because one of the things we do want to do is explore partnership working with great organisations which in local communities do give affordable credit, such as credit unions."

Ms Ussher said that loan sharks were lending money at rates of up to 1,000% and ministers wanted to make credit more easily available so that people in difficulties are not tempted into their hands.

Union leaders said any such plans should be dropped immediately.

Mark Serwotka, General Secretary of the Public and Commercial Services Union said: "These plans are scandalous.

"On the one hand the Government has spent billions bailing out the banks, yet on the other they are considering penalising some of the poorest with loan shark rates.

"These proposals go where even Thatcher wouldn't and should be dropped."

Ms Ussher said that the Government wanted to explore the possibility of partnership arrangements with credit unions, because of the good work they do offering financial advice to people who get into difficulties.

She said ministers are also considering lifting restrictions on the kind of expenditure which social fund loans can be used for, so applicants could access state money to buy their children Christmas presents.

"One of the things that we want to do for the Government's social fund loans is to stop having a situation where some people are being encouraged to lie to us, because they are forced to prove that they need loans for things like their boiler breaking down, when actually they quite legitimately want to perhaps buy presents for their kids at Christmas time," she said.

"I don't want them to have to go to loan sharks to do those things that all families have to do, so we are talking about removing some of the restrictions, as long as people can afford to pay it back. But they will not be charged interest for doing so."

Details of a Government consultation document obtained by the Mail on Sunday appeared to suggest that Work and Pensions Secretary James Purnell was contemplating charging interest on social fund loans.

The document said interest would be charged "at affordable rates compared to those charged by commercial lenders in the same market".

The paper set out how the new interest rate would add £47.80 to the cost of the average budgeting loan of £433.30.

This would take an additional four weeks to pay off, at the average loan repayment rate of £10.54 a week.

The report sparked anger from all sides of politics.

Shadow work and pensions secretary Chris Grayling said: "These proposals are simply outrageous.

"Thousands of people are losing their jobs every week, and it is nothing short of extraordinary that the Government's answer is to propose abandoning interest free emergency loans, and start charging 27% a year instead.

"Gordon Brown and James Purnell are behaving like loan sharks.

"If they press ahead with these plans, there will be a huge row in Parliament, and rightly so."

Senior Labour MP Terry Rooney, chairman of the Commons Work and Pensions Select Committee, also attacked the proposals.

He told the Mail on Sunday: "It cannot be right to start charging almost 27% interest on loans to the poorest people, who currently pay zero interest."

Liberal Democrat work and pensions spokeswoman Jenny Willott said: "Charging interest on emergency loans to some of the most desperate people in society is totally unacceptable.

"What the Government is proposing would have people in dire financial circumstances facing an annual APR which is more than twice the current rate of a sub-prime mortgage.

"Providing advice and information about savings and money management is all well and good but when people are so desperate that they need a crisis loan, it's just not the right time."

And former Labour leader Lord Kinnock told BBC1's Andrew Marr Show: "I don't know where the idea of imposing any form of interest on repayment of social fund loans comes from, but I know where it is going to, and that is absolutely nowhere.

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

Asked if he thought it could get through the Commons, he replied: "It won't even get that far."