‘I was really struggling’: Iceland expands interest-free loan scheme it says slashes food bank usage

It’s not just Annamaria’s family who come over for Christmas dinner. Along with her kids and their children, she cooks for elderly and isolated neighbours who’d otherwise be alone on the day. In total, in her house in Derby, 13 of them tuck in to turkey, ham and lamb. “It’s nice because we don’t get to do that during the year,” says Annamaria.

The 46-year-old mother of four manages through the festive season by using Iceland Food Club, an interest-free loans scheme offered by the retailer which allows customers to borrow up to £100 and pay it back at £10 per week, building their credit score in the process. Annamaria, who works as a cleaner in a hotel, first started using the scheme when there were hiccups with payment at work.

“There were a lot of issues with payroll at work, and I was just really struggling. My friend went to a food bank for me,” she says. But as bills have risen, it has become a lifeline, allowing her to keep the heating on.

She cares for her 18-month-old grandson and needs to keep the house warm – he can’t just sit under a blanket all day. “To be honest, it’s quite difficult. I work 25 to 30 hours a week and I still have to be topped up with universal credit.”

Backed by loans from Fair For You – an ethical lender supported by Big Issue Invest – the Iceland Food Club is estimated to have been used by 30,000 customers, to the benefit of 24,000 children. An independent report by The Centre for Responsible Banking and Finance has found that, among those using the scheme, there has been a 77% reduction in food bank usage, while 22% have stopped cutting back on essential items and 18% have been better able to heat their homes.

As Christmas rolls around, it is expanding with up to £2m in extra lending capital, provided by the government-backed Fair4All Finance – an expansion it believes could allow it to serve hundreds of thousands.

The Iceland “microloans” range from £25 to £100, in the form of a prepayment card to be used in Iceland, and after the initial loan can only be taken out during school holidays. They are a way for those who cannot ordinarily get credit to afford essentials during periods of strain, and pay them back when times are calmer.

For the customers, of whom 18.7% said they had used credit to pay for food and other essentials in the past, there was a three-quarters reduction in the use of loan sharks.

More than nine million adults in the UK were refused credit in the 12 months from April 2022, while 23% of people said in early 2023 the cost of living crisis had driven them to borrow more. Around one million people in the UK borrow from illegal money lenders, according to a report from the Centre for Social Justice.

After getting into debt years ago, Annamaria’s credit score still suffers despite her clearing the debt. It’s left her wary of other, high-interest loans. “I do struggle because of my income and because my credit score isn’t great,” she says.

“They want ridiculous amounts of interest, and for me, I’m not prepared to get myself into debt like that.”

While poverty and extreme prices push people towards loan sharks, some action is being taken. The Illegal Money Lending Team, a law enforcement agency, said it had arrested 327 loan sharks in the six years to 2024, with 21% of its operations taking place in the North West. 

In one case in April 2024, a court ordered two London loan sharks to hand back £1.2m. In May, a loan shark who drove victims to cashpoints in the boot of his car, was jailed for seven years.

For those locked out of mainstream credit yet struggling with bills – debt and arrears on energy bills rose by 12% within the space of three months in 2024, to £3.7bn – options are limited.

The government offers some interest-free loans, including the No-Interest Loan scheme. But this finance of up to £2,000 across 18 months, requires a referral by a lender, credit union or housing association.

In the gap, buy now, pay later schemes are rising. Klarna, which offers interest free payment split across three payments, has faced criticism that it encourages shoppers to spend more than they can afford (something Klarna denies, pointing to low default rates). In November – just in time for the Christmas rush – John Lewis became the latest retailer to offer customers the chance to spread costs via Klarna.

“Personally, we don’t like the buy now, pay later model of putting things in your shopping basket and working out later how you’re going to pay for it,” Simon Dukes, chief executive of Fair For You, says.

“For those small items, it just adds up. People can take out buy now, pay later loans and not necessarily remember that they’ve taken them out, and it just adds to the debt spiral in many ways.”

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