Credit unions help Britons survive – but can they really compete with banks? | Borrowing & debt

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Credit unions have proven to be a lifeline for many people during the pandemic and the cost of living crisis, and now they are allowed to offer a wider range of products.

Zero-interest loans for people in financial vulnerability are being piloted and have so far helped borrowers pay for items ranging from school uniforms to essential furniture.

Meanwhile, more than a dozen credit unions have banded together to run a raffle savings account where someone wins £5,000 every month, in a bid to attract new customers to deposit money from them.

And the changes to the pipeline mean they will for the first time be able to offer products such as car financing to their members.

These moves could help make credit unions a serious alternative to UK banks and other big players. However, some people may be concerned that since January, five have gone out of business.

Credit unions are member-owned and controlled non-profit cooperatives that have traditionally specialized in loans and savings for the less well-off.

There are around 400 in the UK, and membership is based on a ‘common bond’, who may work in a particular industry or live in a certain area.

To find a credit union you may qualify for, go to findyourcreditunion.co.uk

Proponents say they play a unique role in providing an ethical home for people’s savings money and affordable loans to those who might otherwise be forced to turn to high-cost lenders or loan sharks.

In a speech last month (May), Treasury Economics Secretary John Glen paid tribute, saying that “time and time again the sector has lived its core values… putting people before profit and meet the challenges of our time.

In recent years, credit unions have increasingly targeted people of all incomes, and many have branched out into checking accounts, mortgages, and other products.

Despite support from many quarters, credit unions have remained relatively low profile in Britain. But membership is on the rise: the number of adults in the UK has reached 1.92 million, a new record, according to the latest data from the Bank of England. However, the number of “young filers” (i.e. children and young people) has been steadily declining for some time and now stands at 212,000.

In England, Scotland and Wales, the amount of interest credit unions can charge on their loans is capped at 3% per month on the declining balance, or 42.6% per annum APR (the cap is higher). low in Northern Ireland). This means that they can sometimes offer a very good deal for those borrowing small amounts over shorter periods.

However, many people who have essential borrowing needs, such as meeting unexpected expenses, cannot access or afford existing forms of credit. Some could afford to repay a loan over time, but not the often high interest levels that can be involved.

As a result, the government provided Fair4All Finance – a non-profit organization set up in 2019 – with £3.8 million in funding to pilot an “interest-free loan scheme” for people in this situation.

The first phase of the pilot is now underway. Since January, the South Manchester Credit Union has been offering interest-free loans of between £100 and £2,000.

Customers may be eligible in situations where they are denied a standard interest-bearing loan for affordability reasons, but the removal of interest makes the loan affordable. Or they may have been barred from accessing credit but their circumstances have changed, meaning their credit score shouldn’t be a barrier to lending.

“So far, the average loan value has been £490, with reasons for loans ranging from payment for driving lessons and initial childcare costs to enable customers to return to work, to funds for housing and to purchase school uniforms, essential furniture and white goods,” says Fair4All Finance.

The average loan term is 12 months, but the South Manchester Credit Union says it can go up to a maximum of 24 months for larger loans. Most of the applicants had poor or very poor credit ratings, but to date 94% of refunds had been honoured, he adds.

Officially, the South Manchester Credit Union’s interest-free loan pilot is over, but “we’re still doing it,” says Sheenagh Young, its chief executive. “We called it the Stepping Stone loan.”

Among those who removed one was Zainab, 43, a mother of three who had moved into a new home after domestic abuse. The property was largely unfurnished and she needed a loan to buy carpets, beds and bedding. Her credit rating has been damaged by recent utility company defaults related to her running away from her former home. Her income was also limited, but the credit union was able to offer her a £300 interest-free loan to have carpets installed and referred her to local organizations to help with the beds.

A wider pilot rollout is expected to begin later this year.

A separate program to test a raffle savings account called PrizeSaver was run between late 2019 and early 2021. It proved successful, and 16 credit unions across the UK – including South Manchester, London Capital, Clockwise and Plane Saver – continue to operate. PrizeSaver.

With this, every €1 in your PrizeSaver account at the end of the month gives you automatic entry into the following month’s draw. You get a maximum of 200 entries per month, even if you have over £200 in savings. Each month, one person in one of the 16 credit unions earns £5,000, 10 savers earn £50 and 10 earns £20.

The upcoming Financial Services and Markets Bill is expected to include a provision allowing credit unions to offer hire-purchase and conditional sale (similar to hire-purchase) agreements to their members. This means that, like their American counterparts, they would be able to offer products such as auto financing.

Five credit unions have gone bankrupt since January, although some in the industry say those that go out of business often tend to be small, with a few hundred active members. Credit unions are covered by the Financial Services Compensation Scheme, which protects savings up to £85,000.

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