Credit unions will go head-to-head with payday lenders after the Government announced it would raise the cap on interest charges so that unions do not make losses on short-term loans.
The Treasury yesterday confirmed it will introduce legislation that from April 2014 would raise the interest rate ceiling on credit union loans from two per cent to three per cent a month following a consultation with lenders. Three per cent a month works out at APR of 42.6 per cent.
Currently, restrictions on interest rates mean that while unions can make decent returns on long-term loans, loans of a similar length to those offered by payday lenders tend to operate at a loss.
Helping hand: Short-term credit union loans will be more expensive, but more sustainable for unions and still well cheaper than payday loans.Raising the interest cap on the reducing balance of loans will make short-term loans from credit unions more expensive, but at a maximum APR of around 42.6 per cent they will still be significantly cheaper than the astronomical rates charged by payday lenders.
A £400 loan would cost around £477 if paid back over the course of a year, whereas the same loan with a payday lender could end up costing thousands of pounds - though payday lenders take great pains to point out that their loans are designed for 30-days and that using annual interest rates is misleading.
More... Credit Union push to force out payday lenders with landmark expansion that will see local co-operatives join forces Ban payday loan adverts on campus at colleges and universities, says NUS Search for the best loan deal Looking for a loan? See if you could you get a better rate through lend-to-saveSajid Javid MP, economic secretary to the Treasury, said: 'Credit unions provide an invaluable service to people on lower incomes, offering sound financial advice and responsible lending.
'Allowing the maximum rate of interest to increase will allow credit unions become more stable and allow them to offer reliable, affordable credit to consumers who may have to resort to more expensive means.'
Credit unions are community-based, not-for-profit co-operatives in which members pool their savings to offer each other credit.
Although they tend to offer lending rates at higher prices than the headline rates on the High Street, they are more likely to approve lending to those who would otherwise be rejected by mainstream lenders.
The Government is hoping to double the amount of people using them to two million by 2019, and more than 30 unions have launched a cost-sharing expansion project designed to cut interest on loans, improving savings interest and make unions more accessible.
CHEAPEST RATES ON £7,500+ LOANSProvider APR 1 Sainsbury's 5.0% 2 Derbyshire 5.0% 3 M&S 5.0% 4 Clydesdale 5.1% 5 Tesco 5.1%
Mark Lyonette, chief executive of the Association of British Credit Unions (ABCUL), said: 'We welcome the Government’s response on the interest rate consultation and the decision to give credit unions more flexibility to charge a higher interest rate.
'It is clear from the range of interest rates credit unions currently charge that this won’t mean a blanket rise in the cost of all loans – credit unions’ loan rates currently start at around 8 per cent APR for larger loans and as low as 4.25 per cent for mortgages – and many credit unions won’t change their rates at all.
'But some credit unions may choose to raise the interest rate on smaller, short term loans if this will enable them to sustainably offer an affordable and ethical alternative to more people whose only other choice may be doorstep loans at 400 per cent APR or payday loans at 4000 per cent APR.'
The Welsh Government will announce today a £1.9million investment to increase credit union membership.
Some £612,000 of this will support the work of Welsh credit unions for another six months, from October this year to March 2014, with a further £1.25million available to unions which present business cases setting out how they will extend their reach and services.