Credit unions take on payday lenders

Edinburgh's Capital Credit Union offers member short-term, easy-access loan products. Picture: Jon Savage
Edinburgh's Capital Credit Union offers member short-term, easy-access loan products. Picture: Jon Savage
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CREDIT unions in Scotland are targeting both banks and payday lenders following the launch of a scheme aimed at boosting membership of the mutuals.

The UK government is investing £36 million in the sector in a deal it claims could save struggling households up to £1 billion in interest payments by offering them an alternative to extortionate payday loans.

More than 30 organisations have signed up for the Credit Union Expansion Project, including 1st Alliance Credit Union and Pollok Credit Union in Scotland, with many more expected to join over the coming months. The scheme wants to attract a million more people to credit unions, membership of which is typically drawn from those living or working locally or belonging to certain organisations.

Membership of Scotland’s largest credit unions has already grown considerably since the banking crisis began, due to a combination of consumer antipathy towards the banks and demand for affordable credit that is increasingly out of reach on the high street.

Mark Lyonette, chief executive of the Association of British Credit Unions, said the new investment would help credit unions offer more products and attract a wider range of members.

“Consumers will soon be able to benefit from the latest online technology to sign up to credit union services such as current accounts, budgeting accounts and cash Isas,” he said.

So does this mean the average bank customer may in future look at credit unions when shopping around for loans or savings? Lyonette believes they will.

The key to making such products more competitive lies in the creation of centralised processes that will give credit unions better economies of scale, according to Lyonette. The result, he predicted, would be lower loan rates and better returns on savings.

The move follows the introduction last year of new rules allowing credit unions to loosen their membership criteria and pay interest on savings deposits for the first time.

However, the biggest impact of the expansion programme – should it succeed – may be in preventing more struggling households from turning to payday lenders.

Keith Dryburgh, a social policy manager at Citizens Advice Scotland, welcomed the initiative.

“People who need to borrow often don’t consider credit unions as an option because they are not familiar with them. Instead they just go straight to the big payday lenders, which of course are brilliantly marketed, but which often charge massive interest rates,” he said.

“One of the main pieces of financial advice we give to people is that, if they must borrow, they should shop around for the lender who offers them the best deal, and this will often be a credit union.”

Glasgow Credit Union, Scotwest and Edinburgh’s Capital Credit Union are among several with short-term, easy-access loan products designed to stop their members from using payday lenders.

The latter two offer Fast 500 and Swift 500 loans respectively, giving borrowers same-day access to £500 loans at 26.8 per cent APR (the maximum interest rate that credit unions can charge on loans). Glasgow Credit Union’s Everyday Loan has a rate of 14.9 per cent on amounts from £500 to £3,000. The Glasgow reported a 39 per cent spike in unsecured lending in March and April this year, the biggest rise since the recession began.

The demand reflected the difficulty of securing affordable finance on the high street since the financial crisis unfolded. Some members have resorted to payday lenders, 
unaware that they may be able to get a loan from their union.

“Payday loans are the bane of our lives,” said Marlene Shiels, chief executive at Capital Credit Union. “We’re starting to see members with protected trust deeds where all the main creditors are payday loan firms. It’s storing up a lot of problems, but we’re now seeing more people taking up our alternative to payday loans.”

June Walker, chief executive at Glasgow Credit Union, also believes people are beginning to check credit union loan rates before signing up to payday loans.

“Whilst credit unions aren’t included on best buy tables, more and more people are visiting our website to look at our rates, discovering that we are the best option for them,” she said. “That’s why there was so much demand for our consolidation loan that allowed members to repay high interest loans and credit cards off, consolidating them all to one low-interest loan with us.”

But credit unions also need to appeal to savers, not least because they need that money to fund their lending.

Most continue to pay savers in the form of retrospective dividends, despite the rule change last year allowing them to offer interest-bearing products.

However, many have interest-paying savings products in the pipeline, which may eventually be included in the influential “best buy” tables on product comparison websites.

But what credit unions do offer that is popular is the ability to save into their accounts straight from salary. “In every survey of members we have ever done, they tell us that the convenience of saving through payroll is the biggest single reason for using a credit union,” said Shiels.

Its most popular savings product is a cash Isa. The union recently lowered the return to 2 per cent – still above the rates offered by many high-street providers – to control the money coming in. Glasgow Credit Union typically pays savers the equivalent of 
3 per cent interest, while Scotwest has a 90-day notice account with a “proposed” annual return of 2 per cent.

All credit unions are authorised by the Financial Conduct Authority and deposits up to £85,000 are covered by the Financial Services Compensation Scheme.

The hope is that the deals offered by credit unions will soon be sufficiently attractive to tempt bank customers of all socio-economic profiles to consider joining their local union.

However, the expansion project may be too ambitious, Shiels fears.

“It could be the most exciting thing to happen to the credit union movement if they manage to pull it off,” she said.

“But if credit unions concentrate only on low-income 
customers they will fall over. It’s important to get the socio-economic balance right.”