CREDIT unions have been moved to the frontline in the battle against payday lenders as unscrupulous firms target Scots in need of a Christmas cash boost.
Years on the periphery of UK financial services are drawing to a close for credit unions, with the Scottish Government last week putting them at the centre of a campaign promoting alternatives to payday lenders. It comes months after the UK Government launched the £36 million expansion project in a bid to widen membership of credit unions.
But while they have a strong presence north of the Border, restrictions on credit union membership means their ability to combat payday lenders is limited.
The Scottish Government’s “12 days of Debtmas” campaign is aimed at people who may put their finances at risk over the coming weeks by turning to high-cost credit to fund their festive spending. By promoting credit unions as a more affordable alternative, it wants to stem the rapid increase in the number of Scots using payday lenders.
The number of people seeking help from StepChange Debt Charity Scotland more than doubled in the weeks following Christmas last year, when more than a quarter of its customers were struggling with payday loan debts. And research from Money Advice Service suggests more than a million Britons will use payday loans this Christmas.
There are also concerns that payday lenders are aiming for a bumper festive season before they come under Financial Conduct Authority regulation next April.
So how do credit unions offer an alternative? The movement has grown since the financial crisis unfolded and more than 350,000 people in Scotland are members.
The biggest in Scotland are the Glasgow, Scotwest and Capital Credit Unions, all of which offer loan deals designed partly to deter members from using high-cost credit. All have reported a rise in demand for short-term borrowing as wages have stagnated, living costs have soared and government welfare reforms have taken effect.
But while credit unions promote quick-decision loans with interest rates capped at 26.8 per cent – and which can be repaid through payroll or direct debit – there are still criteria to satisfy. All members are treated equally, according to the Scotwest, which said applications are assessed on an individual’s ability to repay the loan, their current commitments and their credit history with other organisations.
“Whilst there are no restrictions on the amount a member can apply to borrow, our lending decisions are based on affordability,” it added. “As a responsible lender we encourage our members to get into the habit of saving and develop a savings history with us.”
Glasgow Credit Union offers loans from £500 to £20,000 with repayment periods of 12 months. Its Everyday Loan allows members to borrow between £500 and £3,000 at a rate of 14.9 per cent APR, with decisions typically given within 24 hours. It reported a 29 per cent hike in the value of loans advanced in the year to September and an acceptance rate of 73 per cent.
June Walker, chief executive of Glasgow Credit Union, said it discourages members from using high-cost, short-term borrowing. But she added: “We do not compete with payday lenders. We prefer to take a more responsible approach to lending, as in many cases, these short-term fixes are symptoms of longer term financial issues.
Capital Credit Union in Edinburgh offers the Swift500 Loan, capped at £500 at a rate of 26.8 per cent. It promises quick decisions to those in need of funds and has a repayment period of nine months.
Marlene Shiels, chief executive of Capital Credit union, said: “We have witnessed the devastation that payday loans can cause and wanted to offer our members an alternative which would provide the features they are looking for.
“Our Swift500 loan offers a quick decision, easy application and up to nine months to repay, without the crippling interest rates and unethical practices often experienced when taking a loan from payday lenders.”
Yet credit unions remain out of reach for many people. Membership is still limited to those living or working locally or belonging to certain organisations, such as trade unions, housing associations or religious groups.
So while they do offer a genuine alternative, there’s a limit to the role they can play in preventing more people from being lured into the payday loan trap.