If you’ve taken out a loan in the past, you may have found you’re charged additional money on top of the amount you borrow – or interest.

Lenders charge this in exchange for loaning you the money. Sometimes, when the interest rate is high, it can create a debt trap as more money is borrowed to pay back the loan and the interest.

An alternative option for people who need money for essential items is a No Interest Loan.

One of the providers of No Interest Loans (NILS), not-for-profit organisation Good Shepherd, provided this explainer about how they work.

What is a NILS loan?

NILs is an alternative to the high cost finance options such as payday loans or ‘rent to buy’ products, which often compound a person’s financial situation.

Under the scheme, what you borrow is what you pay back – there are no interest or fees charged.

When a borrower makes a repayment, those funds become available for more loans in that community (the Circular Credit Community model).

What can the loans be used for?

NILs can be used to access essential household items (fridges, washing machines etc), medical care and educational equipment.

How much can be borrowed?

Loans up to $1,500 are available to eligible applicants.

Who can apply?

To be eligible you must:

• have a healthcare or pension card
• earn under $45,000 ($60,000 for couples or people with dependents)
• have lived in your current or previous residence for three months; and
• show you have the capacity to repay the loan.

More information is available at nils.com.au.

Good Shepherd is funded by the Australian Government and supported by NAB.