A new £2m fund has been launched to incentivise FinTechs and community lenders to create new and more affordable quick credit .

The Affordable Credit Challenge, backed by the UK government and UK charity Nesta, aims to combat the prevalence of high-cost payday and guarantor loan firms.

Development grants of between £125,000 to £150,000 will be awarded to up to six community lender or FinTech partnerships in November 2019.

A spokesperson from the fund said: “While high-cost credit has a role to play in the market, too many people have been turning to these lenders – such as payday or guarantor loans – when it has not been appropriate for their own personal situation.”

The fund aims to encourage the use of credit unions, who are not-for-profit financial cooperatives, and other types of cheaper community lenders.

"These types of lenders can offer loans at far cheaper rates than high-cost short-term lenders, with the interest rate capped at 42.6 per cent compared to an average of 1,250 per cent for a high-cost lender.”

Its results from its most recent survey suggest ineteen per cent of people in need of cash wouldn’t know where to find a credit union or community lender, and one in ten were put off because of their lack of a website or app.

Economic Secretary to the Treasury, John Glen said: “Most of us will rely on borrowing of one form or another during our lives, whether through loans, credit cards or a mortgage. However, millions of people struggle to access fair and affordable credit.

“I want to see more people benefit from the transformative power of digital technology, which is why we have launched the Affordable Credit Challenge. This is a vital opportunity for fintechs to work with community lenders to give more people control over their money.”    

Figures from the Financial Conduct Authority (FCA) show that consumers took out 5.4 million high-cost short-term loans in the year to the end of last June and paid £800m in interest and charges on them.

Nesta Challenges head of better markers Chris Gorst added: “Technology is already transforming how we manage our money every day, but our trusted community institutions - like the local credit union - have fallen behind in the use of technology. This means they often struggle to reach customers or compete with the speed and convenience offered by high-cost lenders. It’s now time for the fintech innovators to unite with social lenders and transform the personal lending market for the better.”

Prize winners will be announced next year.