#loans for people with poor credit
What are credit unions and how can they beat payday lenders?
What are credit unions?
A credit union is a co-operative offering current accounts, savings accounts and loans to its members. Traditionally, members have had to share something in common, such as a locality, industry or workplace. This is known as a common bond. In 2012, the law changed so that credit unions can offer membership to people who don’t share that common bond.
How long have they existed?
The first credit unions were formed in Germany in the 19 th century, and the idea later spread to the US and elsewhere. The UK was late to the party: one of the first credit unions in Britain was the Hornsey co-operative, formed in 1964 by West Indian immigrants who couldn’t get access to loans from banks.
What is the advantage of joining a credit union?
Credit unions are run for the benefit of their members, not for shareholders, so there are no management charges on savings or loans.
They are a particularly good option for people who are on low incomes. Credit unions tend to be more more flexible than traditional lenders, says Lindsey Appleyard, a research fellow at Coventry University. “They respond to people’s needs; so if they need to wait an extra couple of days for their loan to be repaid or if they need to make the payments lower for a longer period of time, they have the facility to do so.”
Is the UK credit union movement growing?
Yes. Growth was slow at first, and it took 40 years for credit unions to reach half a million members. In the last 10 years, however, that membership has doubled: new figures from the Bank of England show that there are now 1.1 million adult members of credit unions, which have assets of 1.2bn .
The Association of British Credit Unions Limited (ABCUL) hopes that membership will reach 2 million by 2020. The movement has been helped to grow by 38m of funding from central government in the last two years.
What are the challenges facing credit unions?
Not everyone is aware of credit unions – they don’t have the capacity of payday lenders to advertise their services.
To be sustainable, credit unions have to attract better-off people to save with them. Making lots of small loans is expensive, so credit unions also have to attract more credit-worthy members who want to take out larger, long-term loans. Frank McKillop, policy manager at ABCUL Scotland, says they face competition from other lenders: “People who are good for a loan are constantly being offered by credit.”
Many payday lenders offer their services over the internet, and are often prepared to make instant loans. Credit unions, traditionally offering a face-to-face service, have been left behind, but increasingly, says Appleyard, they are moving online in order to compete.
Are they markedly better than payday lenders?
Yes – hugely so. Credit unions cannot charge more than 3% interest a month, which works out at 42.6% APR. Since January 2015, there has been a cap on payday lenders. imposed by UK watchdog the Financial Conduct Authority, with interest and fees capped at 0.8% a day and the total cost of a loan limited to 100% of the original sum. As experts point out that still means payday lenders are far more expensive. “The cap for payday lenders is eight times more expensive than the most expensive credit union loan,” says McKillop.
Why are councils getting involved with credit unions?
If local people are borrowing from local credit unions rather than payday lenders, the money stays within the community, boosting the local economy. Councils also want to prevent poorer residents from falling heavily into debt to high-interest lenders. Finally, councils benefit if their employees join credit unions – research shows that money worries have an impact on productivity.
How are they getting involved?
Many encourage their employees to join credit unions. Others offer funding to credit unions or work in partnership with them. Leeds city council, for example, has helped increase membership of the Leeds City Credit Union from 11,000 to 31,000 in 10 years. The council provides access to the credit union services through its own one-stop shops and community hubs.
Which councils have the strongest links to credit unions?
Glasgow has very strong historic links. About 25% of the city’s population belongs to a credit union, and that is in part due to support from the city council. None of the city’s 34 credit unions is charged rates, says McKillop, and council officers provide the unions with guidance. Council employees can save in a credit union through their payroll, and also take out and pay back loans through payroll.
Earlier this year, Sheffield city council set up Sheffield Money in response to research showing that that 50,000 people in the city were borrowing a total of 40m a year from high-cost lenders. It acts as a one-stop shop bringing together credit unions and other organisations, such as Five Lamps. a charity providing loans, and white-goods providers willing to sell products with low-interest repayments. It’s a model that has attracted a lot of interest from other councils.
The service offers an initial triage to assess people’s needs – whether, for example, they need a loan or help managing their utility bills. Mazher Iqbal, cabinet member for public health and equality at Sheffield city council, who helped establish Sheffield Money, wants to make the service as accessible as possible: “If we can’t respond to what’s out there on the high street, we’ve lost the battle.”