20th December 2015
Typically, Credit Unions are small, member-run, non-profit organisations. They offer loans, current accounts and savings accounts. Until 2012, members had to either be part of the industry and/or workforce of the area or live there. More and more now provide support for sustainable community development with efforts to prevent capital flight, keeping money from loans within the area.
Firstly, they have significantly lower interest rates than payday lenders. The common comparison is made between them and the UK’s largest payday lender, Wonga. Credit Unions charge 3% monthly in contrast with Wonga’s 1% daily interest rate which translates to approximately 35% monthly. Frank McKillop, policy manager at ABCUL Scotland reported that “The cap for payday lenders is eight times more expensive than the most expensive credit union loan”. Secondly, as they are run by members, there are no shareholders and this means there are no management charges for savings and current accounts.
However, there is upward pressure on Credit unions interest rates due to low profitability. As of April this year, monthly interest rates were allowed to be increased from 2% to 3%. It is only a matter of time until they are forced to increase this further. Although currently it is still lower than payday lenders, there are many restrictions and bureaucracy that are involved with applying for a loan from Credit Unions, for example, most do not offer loans online. Also, many only allow those who live in the immediate area to borrow from them, for example, Glasgow Credit Union prevents those living or working outside of the ‘G’ postcode from applying. As a result, they all remain small and don’t have the capacity of payday lenders. This prevents them from developing a large base of operations and benefitting from large scale operations. In turn, this (along with non-repayments) leads to added pressure of low profitability as making many small loans is expensive. So in the long term, this could be unsustainable and may require increases in interest rates.
As Credit Unions are based in small areas across the country, there is a vested interest for Councils to promote them as money from loans will remain within the local economy in comparison to with payday lenders which have the potential to syphon money out of the local economy. They also want to prevent local residents from falling into heavy debt. They are encouraging their own employees to join Credit Unions in an attempt to prevent the use of high-interest lenders as well as offering financial support which would allow them to work together with the unions. They provide easier access to credit unions accounts and loans which lowers red tape. For example, 25% of Glasgow’s residents are part of their credit union and council employees can repay loans or take a new loan out straight from their salary. As a result, the bureaucracy mentioned above is reduced and access to Credit Unions has increased.
In the short term, Credit Unions seem a viable option for those looking for an alternative to payday lenders due to the currently lower interest rates. However, this will not remain if there is not more co-operation between unions around the country.