Every year, UK lenders could be making around £2bn of small-sum loans to people who can afford to repay them, at a profit, fully within the rules — and they aren't. That's L.E.K.'s estimate of the gap between the demand for this credit and the supply actually on offer. It exists for one main reason: the cheap capital that used to fund this lending has pulled out of the market, so the responsible lenders still operating can't fund enough loans, at low enough cost, to meet the demand in front of them. The borrowers are there and they can pay. The money to lend them has dried up.
That matters because of who's left waiting. Sixteen to seventeen million people in the UK now have what the industry politely calls “non-standard” credit needs — thin files, impaired files, or both. The market that used to serve them has shrunk from £4bn in 2013 to around £500m in 2024. When regulated supply disappears, demand doesn't; it just goes somewhere worse, and at the bottom that means illegal lenders charging rates north of 10,000% with menace attached and no ombudsman to call.
And here's the part that gets lost: for a lot of these people, a small loan done well isn't just emergency cash — it's a gateway. A thin-file borrower who takes out a modest, affordable loan and repays it builds a track record. That record is the thing that eventually unlocks mainstream credit at mainstream prices. Choke off the entry-level product and you don't just leave someone short this month; you trap them outside the system for years.
The measurement problem, briefly
Most of the current debate is about how we price and present these loans, and Fair4All Finance's Kate Pender put her finger on the issue this month: APR, the number we stamp on everything, falls apart on small, short-term credit. Her example is a £75 loan for seven days that costs £4.20 — and reads as 1,614% APR.
£4.20 is the real cost. The 1,614% is just what happens when you annualise something that was never going to last a year.
Research from Plain Numbers, ClearScore and Fair4All found that showing people a representative APR actually reduces how well they understand what they'll pay.
This is the point, and it's a simple one: small loans can absolutely be innovative and fair, but we keep judging them with a yardstick built for mortgages and car finance. Run a one-week loan through an annual-percentage formula and you get a zany number that tells you nothing useful. It isn't comparing apples with apples — and the same misreading spooks investors as much as consumers, so cheaper capital stays away and the cost circles back to the borrower.
The FCA has finally picked this up in its CP26/15 consultation, which closes on 17 June and asks openly whether representative APR is fit for purpose. That's worth engaging with. But fixing the metric only clears an obstacle out of the road — it doesn't put a single better product in anyone's hands. For that you need actual product innovation, and that's where the UK has been oddly incurious while other markets have been experimenting hard.
Five lessons from around the world
None of what follows is exotic. Each is a working product, serving real borrowers at scale, that the UK could adapt.
No-interest, community-funded credit (Australia). Good Shepherd's No Interest Loan Scheme has reached more than a million Australians, lending up to A$2,000 for essentials — a fridge, car repairs, a laptop — at zero interest and zero fees. The clever part is the funding: capital from NAB plus government support, structured as “circular community credit” so one person's repayment funds the next person's loan. No credit check; affordability is judged on income and outgoings. It works as infrastructure for the bottom of the market. The UK is piloting something comparable through its own No Interest Loans Scheme, but nowhere near the same scale or institutional backing.
Capped, regulated payday alternatives (United States). American credit unions offer Payday Alternative Loans inside a clear federal rulebook: $200–$2,000, terms of one to twelve months, interest capped at 28%, fees capped at cost. It's deliberately unglamorous — a defined lane that lets a trusted institution serve a need that would otherwise go to a worse provider. The UK keeps debating whether such lending should exist at all; the US drew the box and let people lend inside it.
Payroll-linked lending (US, and increasingly the UK). This one has the strongest evidence behind it. Kashable and TrueConnect in the US let employees borrow and repay straight from payroll, which collapses default risk and pulls rates down with it. The UK has a genuine head start: Wagestream now offers workplace loans across its client base after a £300m facility from Citi, and reports that 73% of users cut their payday-loan use and 72% lean less on credit cards. When repayment is frictionless and the employer is the distribution channel, the whole economic picture changes.
“Low and grow” credit-building (Brazil). Nubank starts customers with a small, often secured limit and raises it as they show they can pay — a deliberate on-ramp from no credit to mainstream credit, now used by millions. This is the gateway idea made into an actual product. The UK has an early version in Monzo's Flex Build, backed by Fair4All: access through a one-time deposit with a clear path to mainstream lending. The lesson is that credit-building should be designed on purpose, not left to chance.
Savings circles (everywhere — including, now, the UK). The rotating savings and credit association, or ROSCA, is one of the oldest financial products on earth: a small group each pays in the same amount every month, and each month one member receives the pot. It's used across 90 countries and moves hundreds of billions of pounds a year, almost all of it informally. StepLadder, co-founded by Matthew Addison after he studied the model in Brazil, has built the UK's digital version — pairing people into circles to reach a savings goal far faster than going it alone. It's proof that “group” finance, with peer accountability designed in, can be brought into a regulated UK market rather than left in the cash economy.
What the winners have in common
Look across those five and the pattern is hard to miss. The ones that work don't win by being cheap for the sake of it — they win by designing affordability in. They solve distribution, putting the product where people already are: the employer, the community organisation, the savings group, the app. They strip friction out of repayment, which knocks down default — the single biggest driver of cost. And they treat a small loan as the first rung of a ladder, not a one-off transaction to be priced and forgotten. None of that is a regulatory question. It's a product question.
The point
Getting APR right will help — it will stop good lenders being mistaken for bad ones and may coax cheaper capital back into the market, so it's worth the sector's time before 17 June. But regulators clear runways; they don't build the aircraft. The £2bn gap won't be closed by a better disclosure rule. It'll be closed by someone shipping a product that actually serves those sixteen million people — and the blueprints already exist, in Australia, the US, Brazil and the savings circles running quietly all over the world. We don't need to invent the future of small-sum credit. We need to stop arguing about the price tag long enough to learn from what's already working.
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