The city of Sheffield will, on Monday, launch a range of loans for hard-up residents in a fightback against high-interest deals from Provident Financial, Brighthouse and Wonga. The move, it claims, will save its poorest residents £20m in one year alone.

The new financial services brand, called Sheffield Money, is supported by the city council and regulated by the Financial Conduct Authority.

It promises loans from its website in as little as 15 minutes, a city centre money “shop” so people can call in to obtain loans, and a phone application service for those unable to visit in person.

It is confident that around 25,000 residents, particularly tenants, people on benefits and the unemployed, will take out loans from Sheffield Money over the next year. It also believes the business model could be replicated around Britain, giving hope to millions struggling with paying extortionate interest rates on their debts.

Its rates are far from the lowest in the market – but Sheffield is not trying to compete against Tesco or First Direct. Debt-ridden locals can be paying 272% on 12-month loans from doorstep seller Provident Financial, but will be offered between 49.9% and 89.9% by Sheffield Money. Someone wanting £500 for one year currently has to repay Provident Financial £910, but only £610 to Sheffield Money.

Julie Dore Sheffield councillor

While APRs of 89.9% will strike many as remarkably high, the reality is that borrowers with poor credit ratings are automatically excluded from “best-buy” rates. Instead, many turn to “the Provvy” which handles doorstep collections, or Wonga, which charges 1,509%.

Meanwhile, Brighthouse sells household appliances on a pay-weekly basis that leaves customers paying as much as £700 for white goods that will cost under £300 at Sheffield Money (see box).

As Sheffield City Council leader Julie Dore says “payday and doorstep lenders have been ripping off and exploiting some of the most vulnerable people in our city, preying on their need for available credit and charging extortionate interest rates. Sheffield needs to be able to offer these people a fairer option which will stop them being forced to go to these notorious lenders”.

She adds that the scheme offers a double bonus because, instead of excessive debt repayments sucking money out of the area, it will, instead, stay within the city and be spent on goods and services.

Sheffield tenant Michael Wiggins, 36, (not his real name), who has borrowed from doorstep lenders and “rent-to-own” stores such as Brighthouse, is typical of those Sheffield Money hopes to help. He suffers from depression and mental health issues and is not working.

“For the last eight or nine years, we’ve been scrimping and saving. Things are tight. End of story. At the moment we’ve got a TV and washing machine through rent-to-own stores. I’m paying back well over the odds but there’s nothing I can do – no one else would give us anything.

“We’ve got a big family so needed a big washing machine – it would have cost about £650 from the shops but we’re paying about £2,000 for it. Our TV would have cost about £500 but we’re paying back around £1,000.

If Sheffield Money don’t ask for ridiculous amounts of money I’d definitely use them Sheffield tenant

“I’ve used doorstep lenders when needs be. You’ve got to, but the prices are ridiculous. If Sheffield Money don’t ask for ridiculous amounts of money I’d definitely use them – anything that’s cheaper would be much better.”

Crucially, the city’s council taxpayers aren’t at risk if anything goes wrong and people like Michael fail to repay the loan.

Sheffield Money has brought together a wide number of credit unions and not-for-profit loan providers, in effect acting like a broker and one-stop-shop. They have also linked up with one of the biggest sellers of white goods in the country (it can’t name them yet) to go head-to-head against Brighthouse.

Will Sheffield Money have any more success than the scores of credit unions around the country, which, though well-meaning, have failed to seriously challenge the high-interest lenders?

Until recently, credit unions could charge a maximum 2% a month, although this is now capped at 3%. Even at this level, which is equivalent to an annual APR of 42.6%, the level of defaults means credit unions find it hard to lend to many higher risk groups, and have to decline lots of applications.

Sheffield Money says it will direct its better-off applicants to deals on offer from its credit unions, that start at 12%. But for those with poorer credit ratings – such as the unemployed or those on benefits – it has linked up with Five Lamps, a community reinvestment organisation in Teesside that, since 2007, has specialised in small short-term loans to disadvantaged households in the region. Last year, it made 10,000 loans, averaging £350 each.

The repayment costs compare well against Wonga. A Five Lamps loan of £200 taken out over six months will cost £9.05 a week in repayments, adding up to £235.30 repaid. If the same person went to Wonga for a £200 loan, the cost would be £248 – and it wants the money back in 30 days, with hefty penalties for late payment.

But Sheffield Money is keen to emphasise that it is not about throwing a cheap loan at people who can’t really afford to repay it. Five Lamps says it has to decline around half of all applicants, when it becomes clear from a credit search that the person doesn’t have the means to repay.

Sheffield Money will help people who are rejected by offering a debt advice service. A Citizens Advice agent will attend its city centre branch, although only one day a week at first.

Five Lamps says it has had to write off around 13% of the money it has advanced, which is high but a fraction of the write-offs common at many payday lenders.

For larger loans, of up to £7,500, Sheffield Money will direct borrowers to its credit union partners, Transave UK and Sheffield Credit Union, although it says loans of £1,500 are more typical.

Rob Shearing, chief executive of Sheffield Money, says he is determined to run the operation on commercial lines, yet offer a viable alternative to existing private-sector providers. “We are a not-for-profit, but we will make a profit, and we will re-invest that profit.”

He used to run an independent financial advice business and says cost control will be central to what they do.

The operation will start with four in-branch advisers, although Shearing expects the majority of applications for cash will be online.

Unlike banks and loan providers, the staff will not be commission-led, or given targets to sell financial products.

“Our staff are here to give excellent advice about the best solution for our customers – if we can find a better option for someone than lending money, then we won’t lend.

“When we do lend, we won’t make the loan bigger or the term longer than it needs to be.”