Credit unions to offer instant online approvals as ministers clamp down on payday loans industry
Last month, Wonga was forced to pay borrowers £2.6m in compensation after chasing them with fake legal letters
Credit unions are set to take on payday loans firms by offering instant online approvals from next year. The financial co-operatives currently take up to a week to approve loans for people who might only require a few hundred pounds to make ends meet.
Borrowers have turned instead to heavily automated payday lenders that transfer money almost immediately, but can charge annual interest rates and fees of more than 6,000 per cent, pushing people on low incomes into unaffordable debt.
The Government is trying to crush the payday loans industry, which has boomed since the financial crisis struck in 2007, and thinks it can save people £1bn in interest charges by 2019 by encouraging credit unions.
Last month, the best-known payday lender, Wonga, was forced to pay borrowers £2.6m in compensation after chasing them with fake legal letters. Payday loans companies have also been banned from rolling over loans more than twice – these lucrative extensions put up borrowers' costs even more.
Excluding Northern Ireland, the UK has 400 credit unions with about a million members in total. By March last year, members had saved £843m with the credit unions, around £620m of which was on loan. The Government is keen to raise these numbers. Credit unions tend to be more lenient than high street banks towards people with bad credit histories. Their highest APR is still around 40 per cent, though some charge as little as 7 per cent, making them a good alternative to payday lenders.
The Government has put £38m into the Credit Union Expansion Project, which launches next April. Under the scheme dozens of credit unions will pool their resources to cut down on administration costs.
The project is run by the Association of British Credit Unions Ltd (Abcul) and will vastly improve the industry's use of IT, enabling instant credit scoring. More than 80 credit unions, representing around 400,000 members, are interested in signing up, and another 20 are considering it.
A shared system will let credit unions approve loans online. It is thought that many people go to payday lenders not just because of poor credit histories, but because they need the money quickly and have nowhere else to turn.
However, they must repay the money after just a few days or weeks. Credit unions let borrowers pay back their loans over a longer period.
"This service will help us compete more effectively on speed and convenience. People will be able to apply for credit just the same as anybody applying to Wonga," said Abcul's chief executive, Mark Lyonette.
The Minister for Welfare Reform, Lord Freud, said: "We are determined to [increase] access to safe financial services, which is why we are investing £38m to help credit unions."
However, John Lamidey, a policy adviser at the Consumer Credit Trade Association, warned that credit unions would struggle to "make the payday loans model work". Prolonged borrowing times meant there were more opportunities for default, he argued.
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