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A new not-for-profit lending scheme is being unveiled aimed at giving manageable loans to people who cannot obtain conventional loans.

A pilot scheme has been set up in the West Midlands called My Home Finance, in the hope of diverting people away from borrowing from loan sharks.

However, the interest being charged is higher than the maximum by law that credit unions can charge.

It will charge 29.9% APR in the pilot scheme, rising to 49.9% APR in April.

Mark Lyonette, chief executive of the Association of British Credit Unions welcomed the new initiative, but pointed out that his members could offer loans at cheaper rates.

"By law credit unions are allowed to charge no more than 2% per month interest (26.8% APR) on the reducing balance of a loan," he said.

"This means that a £100 loan will never cost more than £2 per month to borrow."

Target

My Home Finance has been set up by the National Housing Federation (NHF), with 10 branches opening as part of the pilot project.

Customers would have to go through a 45-minute interview to check they would have a realistic chance of repaying the loan before being allowed to borrow sums of about £500. This would then have to be paid back weekly.

People would also be offered debt advice and help in opening a bank account - in a bid to prevent them using loan sharks.

Rates in the legitimate doorstep lending industry tend to be higher, but one of the leading lending companies - Provident - said it welcomed the pilot project.

"This initiative broadens further the range of credit options available to those on lower incomes and introduces yet more competition, which we welcome," a spokesman said.

No restrictions

The current average interest rate being charged for a bank overdraft is 19%, according to the Bank of England.

In June, the Office of Fair Trading (OFT) decided not to recommend the imposition of price controls on expensive but legal forms of short-term borrowing.

It had been looking into the pawnbroking, payday loan and home credit businesses since July 2009.

The OFT decided that although borrowing from those sources was expensive, it met a need for those who could not otherwise borrow cash.

Setting up

The pilot scheme has been launched by Work and Pensions Secretary Iain Duncan Smith.

The "vast majority" of the set-up costs for the scheme have been met by the Department for Work and Pensions, according to the NHF.

There has also been input from local housing associations and the Royal Bank of Scotland.

Some 38 members of staff have been taken on and four branches - in Hereford, Worcester, Walsall and Northfield in Birmingham - are up and running.

By the end of October, others will be open in Coventry, Tamworth, Dudley, Wolverhampton, Birmingham city centre and Erdington. They will be run by East Lancashire Moneyline.

"By offering fair loans at fair prices, we hope to offer an alternative to both loan sharks, who cynically prey on hard up families, and doorstep lenders, who are all too willing to lend cash to the desperate at hugely inflated rates of interest," said NHF chief executive David Orr.

The Federation is planning to open branches across England and it aims to write up to 150,000 loans to people on lower incomes in the next 10 years.

However, the cost of these loans, through interest, will be increased to 49.9% to cover costs when the scheme is expanded across England, a spokesman said.

Mick McAteer, of the Financial Inclusion Centre, said: "While this is a welcome step, it should be put in context. We estimate there are four million people in the UK without access to mainstream affordable credit.

"More needs to be done to give consumers a real choice."

He said the poorest people in the UK had very little choice of loan providers.