The Government and the Church of England have pledged their support towards credit unions but how will this work in practice and what does this mean for borrowers?
The Church of England hit the headlines last week after the Archbishop of Canterbury, Justin Welby, said he would compete payday lenders out of existence and then had to apologise after it was discovered the Church had indirectly invested in Wonga.
But despite this, Welby’s idea is an interesting one and if it works could boost the credit union market and provide a very real alternative to the payday loan industry.
Credit unions
In May it was announced that the credit union network in the UK would be transformed thanks to a major new investment scheme.
This marked the start of a transformation of this market, which has now been bolstered by the Church of England campaign.
The Church of England has a significant following and Mark Lyonette, Chief Executive of the Association of British Credit Unions Ltd (ABCUL), says informing congregations will help to raise awareness of the benefit of credit unions to people from all incomes.
He also argues that it’s the speed and convenience which attract people to payday lenders, not the short-term nature of the loans, and when looking at the costs when a loan is rolled over, it is obvious these are not in the best interests of consumers.
The Church versus Wonga
In theory it’s a brilliant idea – people are offered a cheaper, longer-term loan from a ‘friendly’ mutual instead of taking out an over-priced loan with a payday lender which is likely to saddle them with further debts.
When looking at a loan of £200, borrowed for one month, Wonga charges a typical APR of 5853% and if you miss the payment you’ll then be stung with a fee and the interest rate will remain in the thousands until you’ve paid back the money.
The alternative is taking one out with a credit union. The London Mutual Credit Union, for example, offers loans designed for those with a poor credit score with a much lower rate of 26.8%.
You have three months to repay it – as in nearly all cases those taking out a payday loan aren’t able to pay it back within a month - and there are also no penalties for paying the loan late or early.
But the problem is promotion as Wonga spends around £15million on advertising, and adverts for payday lenders bombard us through TV, radio and internet daily.
In comparison most people haven’t heard of a credit union and there are only one million customers in the UK. On top of this, credit unions haven’t got a great credit record and several have already been closed down this year because they couldn’t afford to survive.
Government scheme
The credit union expansion project is being organised by ABCUL and it will be funded by £35.6 million of Government money.
It will also create a centralised network so customers can access their accounts online, through their local branch and also through the Post Office network.
Under the Government plans member numbers will rise by one million and borrowers will also save £1 billion in interest payments when choosing a credit union loan, instead of one from a payday lender, over the next five years.
How credit unions work
Credit unions are now close to competing with the high street banks and are offering some competitive rates. Most offer a current account, savings account and loans but this differs from branch to branch.
To become a member you must share what is known as a common bond – which could be living in a certain post code or working for an employer. Traditionally the rules around joining a credit union have been strict but from last year these have eased slightly.
Until last year credit unions also weren’t allowed to pay interest and instead paid a yearly dividend. This has now changed but some restrictions apply because only unions which have reserves of at least £50,000 or 5% of the total assets are allowed to do this.
As they don’t receive money through the Government’s Funding for Lending Scheme, they’ve also had to keep interest rates high on savings accounts to attract new money. You can read more about the better rates on offer in our piece - Savers get better returns with credit unions.
Can the credit unions win?
With only one million UK customers, credit unions are still a miniority compared to the high street banks and the payday lenders. The Church of England's plans have created a lot of publicity for the unions - but they aren't enough to help them become a real threat.
The Government can't rely on the Church of England to fight this battle. It needs to act at a faster pace then the five-year investment plan currently in place if credit unions want any real chance at competing with these lenders.