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.

PROMOTED VIDEO
Life and Style
Child's play: letting young people roam outdoors directly contradicts the current climate
lifeHow much independence should children have?
Arts and Entertainment
Tycoons' text: Warren Buffett and Bill Gates both cite John Brookes' 'Business Adventures' as their favourite book
booksFind out why America's richest men are reading John Brookes
Arts and Entertainment
<p><strong>2008</strong></p>
<p>Troubled actor Robert Downey Jr cements his comeback from drug problems by bagging the lead role in Iron Man. Two further films follow</p>
filmRobert Downey Jr named Hollywood's highest paid actor for second year running
Life and Style
Dale Bolinger arranged to meet the girl via a fetish website
life
Property
Sign here, please: Magna Carta Island
propertyYours for a cool £4m
Life and Style
tech
News
The Commonwealth flag flies outside Westminster Abbey in central London
news
Arts and Entertainment
Struggling actors who scrape a living working in repertory theatres should get paid a 'living wage', Sir Ian McKellen has claimed
theatre
Extras
indybest
News
Skye McCole Bartusiak's mother said she didn't use drink or drugs
peopleActress was known for role in Mel Gibson film The Patriot
Arts and Entertainment
tvWebsite will allow you to watch all 522 shows on-demand
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Training Programme Manager (Learning and Development)-London

    £28000 - £32000 per annum + benefits: Ashdown Group: Training Programme Manage...

    Training/Learning and Development Coordinator -London

    £28000 - £32000 per annum: Ashdown Group: Training/Learning and Development Co...

    Business Anaylst

    £60000 - £75000 per annum + BONUS + BENEFITS: Harrington Starr: Business Anal...

    Project Manager - ETRM/CTRM

    £70000 - £90000 per annum + Job Satisfaction: Harrington Starr: Project Manage...

    Day In a Page

    Some are reformed drug addicts. Some are single mums. All are on benefits. But now these so-called 'scroungers’ are fighting back

    The 'scroungers’ fight back

    The welfare claimants battling to alter stereotypes
    Amazing video shows Nasa 'flame extinguishment experiment' in action

    Fireballs in space

    Amazing video shows Nasa's 'flame extinguishment experiment' in action
    A Bible for billionaires

    A Bible for billionaires

    Find out why America's richest men are reading John Brookes
    Paranoid parenting is on the rise - and our children are suffering because of it

    Paranoid parenting is on the rise

    And our children are suffering because of it
    For sale: Island where the Magna Carta was sealed

    Magna Carta Island goes on sale

    Yours for a cool £4m
    Phone hacking scandal special report: The slide into crime at the 'News of the World'

    The hacker's tale: the slide into crime at the 'News of the World'

    Glenn Mulcaire was jailed for six months for intercepting phone messages. James Hanning tells his story in a new book. This is an extract
    We flinch, but there are degrees of paedophilia

    We flinch, but there are degrees of paedophilia

    Child abusers are not all the same, yet the idea of treating them differently in relation to the severity of their crimes has somehow become controversial
    The truth about conspiracy theories is that some require considering

    The truth about conspiracy theories is that some require considering

    For instance, did Isis kill the Israeli teenagers to trigger a war, asks Patrick Cockburn
    Alistair Carmichael: 'The UK as a whole is greater than the sum of its parts'

    Alistair Carmichael: 'The UK as a whole is greater than the sum of its parts'

    Meet the man who doesn't want to go down in history as the country's last Scottish Secretary
    Legoland Windsor's master model-makers reveal the tricks of their trade (including how to stop the kids wrecking your Eiffel Tower)

    Meet the people who play with Lego for a living

    They are the master builders: Lego's crack team of model-makers, who have just glued down the last of 650,000 bricks as they recreate Paris in Windsor. Susie Mesure goes behind the scenes
    The 20 best days out for the summer holidays: From Spitfires to summer ferry sailings

    20 best days out for the summer holidays

    From summer ferry sailings in Tyne and Wear and adventure days at Bear Grylls Survival Academy to Spitfires at the Imperial War Museum Duxford and bog-snorkelling at the World Alternative Games...
    Open-air theatres: If all the world is a stage, then everyone gets in on the act

    All the wood’s a stage

    Open-air productions are the cue for better box-office receipts, new audiences, more interesting artistic challenges – and a picnic
    Rand Paul is a Republican with an eye on the world

    Rupert Cornwell: A Republican with an eye on the world

    Rand Paul is laying out his presidential stall by taking on his party's disastrous record on foreign policy
    Self-preservation society: Pickles are moving from the side of your plate to become the star dish

    Self-preservation society

    Pickles are moving from the side of your plate to become the star dish
    Generation gap opens a career sinkhole

    Britons live ever longer, but still society persists in glorifying youth

    We are living longer but considered 'past it' younger, the reshuffle suggests. There may be trouble ahead, says DJ Taylor