Community lenders rise to the challenge of lowering cost of credit

Many of us will borrow money at some point during our lives. But for some people the options may be more limited – and more expensive – perhaps because they’ve struggled financially in the past.

Those in debt often compound their problems by turning to high-cost loan firms. Picture: PA

Around three million people across the UK – many of whom may find it hard to get a loan from a mainstream lender – use high-cost credit providers, such as doorstep loan firms or other “buy now, pay later” loan providers.

But there may be more cost-effective ways of borrowing sprouting up – right within your own community.

Recent Bank of England figures show that the total number of credit union members across the UK surpassed two million in 2018, with loans to members exceeding £1.5 billion for the first time. Credit unions, which are run to benefit communities, provide an alternative to other lenders, by offering their members affordable financial products.

There also seems to be an appetite among consumers for a wider choice of places to turn to. More than eight in 10 (82 per cent) people agree that more needs to be done to ensure there are alternatives to high-cost lenders, according to recent research from the charity Nesta Challenges, which is working with the UK Treasury to help widen people’s affordable credit options.

The charity has launched the Affordable Credit Challenge – a competition to help grow real alternatives to high-cost lenders by helping community lenders, such as credit unions, partner with financial technology firms and develop new solutions.

Here, Chris Gorst, head of better markets at Nesta Challenges, explains more about community lenders and how they can help.

What exactly is a community lender?

These are usually non-profit organisations committed to making credit available responsibly to the communities they are rooted in, rather than maximising returns to shareholders. Credit unions and Community Development Finance Institutions (CDFIs) are the most well-known types of community lender.

What products do they offer?

Most credit unions offer savings schemes and short or long-term loans, but some also offer products such as current accounts and mortgages. CDFIs typically focus on making loans and do not offer savings or other financial products.

Is there one in my community?

Probably. There are over 400 community lenders of varying sizes up and down the UK. The website of the Association of British Credit Unions Limited (Abcul) has a handy “find your credit union” function.

Will I be eligible to borrow from a community lender?

To borrow from a credit union, you need to share a “common bond” with the community lender. This can be anything from living in a particular area to being in a certain job or sector.

What are the interest rates on loans like?

The maximum interest rate credit unions are allowed to charge generally is capped at 3 per cent a month, and in Northern Ireland the cap is 
1 per cent a month.

Why haven’t I heard much about them before?

Community lenders can lack access to big advertising budgets and the latest technology – so while they can offer you a low-cost loan, they may not have found it as easy to tell you about it as some high-cost lenders. The Affordable Credit Challenge aims to level the playing field.

What sort of solutions is the Affordable Credit Challenge looking for?

It is not looking for any “one-size-fits-all” solution. Prizes will support partnerships between financial technology firms and community lenders which use technology to compete more effectively with high-cost lenders, whether that’s through an app or an easier process for signing up.

Applications are open to community lender/financial technology firm partnerships until 30 September, affordablecreditchallenge.com.