UK Credit Unions Get Second Wind In Fight Against Payday Lenders

Small credit loans in the UK are finally getting a viable chance to compete with overpowering payday lenders.

Last week the UK government announced it would be raising the monthly interest cap to make it easier for loan seekers to access and use financial services.

Under new legislation the interest rate will increase from 2 percent to 3 percent, alongside the Credit Union Expansion Project, which is facilitated by the Department for Work and Pensions. This project aims to help credit unions decrease running costs and become financially sustainable. The DWP is hopeful that new efforts will help the sector expand its services to one million more consumers by 2019.

After careful evaluation, the government decided interest restrictions needed to be loosened because credit unions were suffering from huge losses due to short-term loan offerings. These losses have contributed to an average of eight credit unions going out of business in the UK each year.

A study conducted by the government discovered the credit unions were not able to break even on short-term lending programs and thus were damaged by the long-term effects.

New legislation has been created to help reduce such losses, and allow credit unions to move away from government support. Ideally it will also help to mitigate cross subsidization with large loans, and enable credit unions to expand their range of products.

Credit unions can use new revenue from higher interest rates to approve lending for customers with higher risk, who are often turned away with the current 2 percent cap.

Customers who were previously unable to get loan approval will no longer be forced to turn to expensive payday lenders, or illegal lenders, to obtain credit. Low-income consumers will benefit from the new opportunity to gain affordable loans.

According to The Daily Mail online, many have argued the government’s should do more to stabilize credit unions. They have argued 3 percent is not enough, and that the cap should be raised further to pass more costs onto consumers. The article suggested that credit unions should introduce a processing fee that would make credit union loans more expensive, yet still cheaper than payday lender fees.

The UK Treasury announced new interest caps would be introduced in April 2014, however said switching would not be mandatory. Credit unions may implement new rates at its own discretion.

To read the full press release on the UK.gov website click here, or to read the article at Daily Mail click here.