New research shows deduction lending adds up for low income borrowers and lenders

Fair4All Finance About us – Fair4All Finance commissioned The Financial Inclusion Centre and the Swoboda Research Centre to assess whether deduction based lending (from payroll or benefits) is effective at providing access to fair and affordable loans for low income borrowers.

The research found clear evidence that payroll and benefit deduction lending delivered appropriately is good for borrowers, good for lenders, and good for employers.

A summary of the report can be found here: Deduction lending research Summary report

The full research report can be found here: Deduction lending and low income borrowers Full report

A presentation from the launch event can be found here: Deduction Lending – Does it all add up for low income earners? – Fair4All Finance

One of Fair4All Finance’s priorities is increasing the availability of affordable credit for people in financially vulnerable circumstances. Community finance providers play a key role in this and have long experience and real expertise in serving customers sustainably and ethically.

For many years, credit unions have had payroll partnerships with employers, where loan repayments are made automatically from the borrower’s salary at source. Recently, some have expanded this deduction model to non means tested Child Benefit, which are more commonly known as Family Loans.

There was some evidence, in the form of many positive stories from borrowers about their experiences, of the benefits of deduction lending. But, there was little in the way of formal research testing the model and its impact on borrowers and lenders. So, Fair4All Finance commissioned The Financial Inclusion Centre and the Swoboda Research Centre to undertake in-depth research to test the model.

What was the research?

The research heard from over 7,500 borrowers about their experiences with payroll and benefit deduction lending. The team worked with seven credit unions, debt advisors, employers and consumer experts. We are very grateful for the input provided by the credit unions and other stakeholders.

The aim of the research was to find out how well deduction lending works for borrowers on low incomes, lenders and employers; where there might be opportunities to improve and grow the offer; and how the model can impact savings behaviour.

What we found was overwhelmingly positive:

  • With over 95% satisfaction rates, this form of lending is hugely popular with borrowers
  • 7 out of 10 borrowers agreed that this type of lending – when packaged up with a savings element – helped them to save more regularly, even when they had never done so before
  • Borrowers felt more confident about managing their money and reported feeling less stressed, anxious, or depressed
  • For lenders, fewer loan applications were rejected
  • And automatic payments meant lower arrears and default levels
  • It works for employers too, improving the satisfaction and wellbeing of their workforce

Overall, the research shows that when delivered appropriately deduction lending can be a credible and effective way of increasing access to affordable credit for lower income households. It offers a scalable solution that can help many more families smooth incomes, meet unexpected costs and start to build their financial resilience.