Credit unions are helping Brits survive – but can they really take on banks? | Borrowing & Debt

Credit unions have proven to be a lifeline for many during the pandemic and cost-of-living crises, and now they’re allowed to offer a wider range of products.

Interest-free loans for the vulnerable are being tried and have so far helped borrowers pay for everything from school uniforms to basic furniture.

At the same time, more than a dozen credit unions have joined forces to run a sweepstakes savings account where one person wins £5,000 every month to attract new customers to deposit money.

And changes in the pipeline mean they can offer products like auto financing to their members for the first time.

These moves could help make credit unions a serious mainstream alternative to UK banks and other big players. However, some people might be concerned that five have halted trading since January.

Credit unions are not-for-profit cooperatives owned and controlled by their members that have traditionally specialized in lending and savings to the less affluent.

There are around 400 of them in the UK and membership is based on a ‘common bond’ who may work in a specific industry or live in a specific area.

To find a credit union that you might be able to join, go to

Supporters say they play a unique role in providing an ethical home for people’s savings and affordable credit for those who might otherwise be forced to turn to expensive lenders or loan sharks.

In a speech last month (May), Treasury Secretary John Glen paid tribute, saying that “the sector has consistently lived its core values…putting people before profit and meeting the challenges of our time”.

In recent years, credit unions have increasingly catered to people of all income brackets, and many have expanded into checking accounts, mortgages, and other products.

Despite support from many quarters, credit unions in the UK have remained relatively dovish. But membership is growing: the number of adults belonging to one in the UK has reached 1.92 million, a new record according to the latest Bank of England data. However, the number of “juvenile depositors” (i.e. children and young people) has been steadily declining for some time and is now at 212,000.

In England, Scotland and Wales, the amount of interest credit unions can charge on their loans is capped at 3% per month on the outstanding balance or 42.6% per annum (the cap is lower in Northern Ireland). This means that they can sometimes get a very good deal for those borrowing smaller amounts for shorter periods of time.

Many people who have significant credit needs, e.g. B. to cover unexpected costs, but cannot access or afford existing forms of credit. Some might be able to afford to pay back a loan over time, but not the often high interest rates that can come with it.

As a result, the government provided £3.8m in funding to Fair4All Finance – a non-profit organization set up in 2019 – to pilot an “interest-free loan scheme” aimed at people in this situation.

The first phase of the pilot project is now underway. The South Manchester credit union has been offering interest-free loans between £100 and £2,000 since January.

Customers may be eligible in situations where they are turned down for affordability reasons for a standard loan with interest, but removing the interest makes the loan affordable. Or they may have been barred from accessing credit but their circumstances have changed, meaning their creditworthiness should not be a barrier to lending.

“To date, the average loan value has been £490, with reasons for loans ranging from paying driving lessons and pre-school prepayments to allow clients to go back to work, to funds for housing deposits and buying school uniforms, important ones furniture and household appliances,” says Fair4All Finance.

The average loan term is 12 months, but South Manchester Credit Union says it can be as long as 24 months for the larger loans. Most applicants had bad or very bad credit, but to date 94% of repayments have been made, it said.

South Manchester Credit Union’s interest-free loan pilot is officially over, but “we’re still running it,” says Sheenagh Young, its chief executive. “We called it the stepping stone loan.”

Among those who took one out is Zainab, 43, a mother of three who had moved to a new home after experiencing domestic violence. The property was mostly unfurnished and she needed a loan to buy carpets, beds and linens. Her credit has been damaged by recent utility defaults related to her escape from her former home. Her income was also limited, but the credit union was able to offer her an interest-free loan of £300 to have carpets laid and referred her to some local organizations to help with the beds.

A broader pilot rollout is scheduled to begin later this year.

A separate sweepstakes savings account testing program called PrizeSaver ran between late 2019 and early 2021. This proved a success and 16 credit unions across the UK – including South Manchester, London Capital, Clockwise and Plane Saver – continue to operate PrizeSaver.

This will give you an automatic entry into the following month’s drawing for every £1 in your PrizeSaver account at the end of the month. You get a maximum of 200 entries per month, even if you have over £200 in savings. Each month one person belonging to one of the 16 credit unions wins £5,000, 10 savers win £50 and 10 savers £20.

The forthcoming Financial Services and Markets Act is set to include a provision allowing credit unions to offer hire-purchase and contingent sale (similar to hire-purchase) arrangements to their members. That means they could offer products like auto financing like their US counterparts.

Five credit unions have shut down since January, although some in the industry say those that go out of business are often on the small side, with a few hundred active members. Credit unions are covered by the Financial Services Compensation Scheme, which protects savings up to £85,000.

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