Mark Lancaster MP argues that we should be doing more to promote Credit Unions as a sensible alternative to pay day loans.
With memories of Christmas already fading the need to pay for it will soon become a reality for many as credit card bills become due or pay day loans require repayment.
The issue of lending has been in the national press over the past couple of weeks and it now has the attention of David Cameron, with his office recognising the problem of short-term lending at high payback rates. This has led to a call for legislation to be put in place to protect those most vulnerable in society from getting into the vicious circle of loans and paybacks with another loan to feed the re-payments. But whilst legislation is one route, should we not be doing more to promote Credit Unions as an affordable but less well known alternative to high interest short term loans?
Many people have been feeling the pinch over the past few months with the rising food and energy prices with Christmas simply an added expense. Rather than deny the family a ‘proper’ Christmas, for some the only solution has been to get a short-term loan to cover the costs. Even now with prices slashed in New Year sales the temptation to buy that new sofa for just a few hundred pounds may be too hard to resist for some resulting in a slippery slide of short term debt which many people don’t manage to get out of.
Lending from so-called-payday-lenders has increased dramatically over the past few years, with reports suggesting that it has increased from £500m in 2007 to a whopping estimated £1.9bn last year. This significant increase has been made easier by the tempting offers from the many online providers with claims that a loan can decided in a matter of seconds and the cash paid into your account in less than 15 minutes. This impulsive borrowing however comes at a price with interest rates somewhere between 1,000 and 4,000% APR on these loans. Of course, these are meant to be short term loans, lasting no more than a month, occasionally two, but there is no check as to whether people can afford to pay back the amount they are borrowing and for some they are simply getting loans to pay back other loans.
There are however options for those who find themselves in the situation of needing to borrow money, namely Credit Unions. Little known as they lack the advertising budget or flash websites of many of the commercial providers, there is however an impressive network of credit unions offering loans to members at very modest rates. I met with the people who run the credit union in Milton Keynes, predominantly to become a member as they are a savings union as well as one offering loans, but also to learn about what the credit union offers. Community based, they offer loans of up to £5,000 with interest rates of 1% per month and a maximum of 26.8% APR, which is significantly less than the payday companies whose APR rates are in the thousands.
Over the past five years Credit Unions have made around 500,000 loans to high risk borrowers, 80% of whom are claiming benefits. There are now 420 operating throughout the UK and many have been supported through the Growth Fund, which has enabled them to increase the amounts they lend and has allowed them to be more flexible about savers and borrowers.
The network is growing but awareness amongst the population remains low and more needs to done to ensure that this very real alternative to pay day loans is used by those most in need.