From the TUC

Why is the Government lending to unemployed people at a 10 per cent interest rate?

24 Jan 2012, by in Society & Welfare

Without much fanfare, the Government has recently launched its New Enterprise Allowance scheme which aims to ‘give extra help to unemployed people who want to start their own business’. The scheme provides a package of support worth £1,274 over 26 weeks, with access to a volunteer mentor. What’s the catch? Although, as CIPD have recently shown, most newly self-employed people are undertaking odd jobs and would perfer to be paid employees, what could be wrong with helping those who want to to make a little extra cash and remain in some form of work rather than claim JSA?

The answer is that the package is in fact meaner than it first appears, apparently comprising a weekly payment that is slightly less than JSA for 13  weeks (£65) and which falls to £33 a week for the remaining 13 weeks, leaving someone on the scheme who isn’t successfully making any cash with less than they would have had on benefits. But even more worrying is the option that all participants will have the opportunity to take out a loan of up to £1,000 repayable at a 10 per cent interest rate to support their businesses.

Many loans providers appear to be private businesses, who seem likely to seek to recover payments from recipients should their businesses fail. Given that rates of small business start up failure are high (this BBC report suggests that 4 out of 5 new businesses fail), and are likely to be higher in more deprived areas and when they are headed by people without previous experience of self-employment, this suggests that a significant number of recipients may find their enterprises do not succeed and that they return to unemployment. The impact? A loan of £1,000 gaining 10 per cent interest annually that will have to be repaid out of JSA of £67.50 a week.

Given this scheme will apparently be made available to 40,000 people nationally, of which it is anticipated 30,000 will take out a loan,  this could mean that around a minimum of 15,000 unemployed people (assuming a 50 per cent rate of business failure before significant profits are generated) find themselves with a £1,000 debt to repay, courtesy of the DWP. No statistics on take up rates provide any details on the number of claimants who have taken out loans, or on rates of business success – I wonder when they will become available.

2 Responses to Why is the Government lending to unemployed people at a 10 per cent interest rate?

  1. Jenny Shepherd
    Jan 24th 2012, 2:50 pm

    This sounds completely mad – have they not learned anything about sub-prime loans?