The founder of Seven Investment Management on how credit unions are taking on pay day loan companies
At last some viable and acceptable competition for the loan sharks (those who are politely known as ‘pay day loan companies’). These bottom feeders that prey on the weakest in society are designed to make handsome profits out of usury. They have been allowed by a weak and pathetic government to get away with charging eye watering rates for short term loans aimed mostly at those least able to manage them. Such exposed people do not need more paraffin to enflame a fire; they need help to put the fire out.
Enter then a little known but often overlooked Victorian invention, the Credit Union. These are non-profit making mutuals that can provide short term lending for their members. Credit Unions are community-based, not-for-profit co-operatives in which members pool their savings to offer each other credit. The Treasury has recently confirmed it will introduce legislation to raise the interest rate ceiling on credit union loans from 2% to 3% a month following due consultation with lenders. 3% a month works out at an APR of 42.6%.
As is often the case with such anachronistic structures, they have been hampered by outdated legislation which has constricted their growth and viability. With the credit unions, they were prevented from having outlandish rates but somehow those same controls failed to apply to the pay day loan companies. Currently, restrictions on interest rates mean that while unions can make decent returns on long-term loans, loans of a similar length to those offered by payday lenders tend to operate at a loss.
Raising the interest cap on the loans will make short-term loans from credit unions more expensive, but at a maximum APR of around 42.6% they will still be significantly cheaper than the astronomical rates charged by payday lenders which can be over 4,000%!
A £400 loan would cost around £477 if paid back over the course of a year, whereas the same loan with a payday lender could end up costing thousands of pounds – though payday lenders take great pains to point out that their loans are designed for 30 days and that using annual interest rates is misleading.
Figures show that as of September 2011, Credit Unions in the UK manage £703m worth of savings from 950,000 people with loans worth £560m as of June 2011. That shows a 300% growth in the past decade.
The mutual section of financial services has come under some scrutiny with the recent Co-op banking fiasco, which has finally surfaced after lurking around since their disastrous takeover of the Britannia Building Society. However, with organisations like Nationwide and Liverpool Victoria, there are some very good names participating. The real benefit that the mutuals should try and promote is the joint ownership – which all too often is not really understood or appreciated. This sense of local community and participation can be a much stronger draw than just a big finance brand.
However, all should be aware that not all savings clubs are Credit Unions and don’t necessarily come under the same rules – just look at the atrocious operations of the ‘Christmas club’ that was Farepak. Another charade to fool financial innocent people out of their money.
Justin Urquhart Stewart is the founder of Seven Investment Management and a regular media commentator. Originally trained as a lawyer, he has observed the retail market industryfor 30 years whilst in corporate banking and stockbroking.
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