Credit unions are helping Britons survive – but can they really rival banks?

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Credit unions have proved a lifeline for many people during the pandemic and cost of living crisis, and now they are being allowed to offer a wider range of products.

Zero-interest loans for people in financially vulnerable circumstances are being trialled, and have so far helped borrowers to pay for items ranging from school uniforms to essential furniture.

At the same time, more than a dozen credit unions have banded together to run a prize draw savings account in which every month one person wins £5,000, in a bid to attract new customers to deposit money with them.

And changes in the pipeline mean they will for the first time be able to offer products such as car finance to their members.

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

Credit unions are not-for-profit cooperatives owned and controlled by their members that have traditionally specialised in loans and savings for the less well-off.

There are about 400 of them in the UK, and membership is based on a “common bond”, which might be working in a particular industry or living in a certain area.

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Supporters say they play a unique role in providing an ethical home for people’s savings cash, and affordable loans to those who may otherwise be forced to turn to high-cost lenders or loan sharks.

In a speech last month (May), Treasury economic secretary John Glen paid tribute, saying that “again and again the sector has lived its core values … putting people before profit and rising to meet the challenges of our times”.

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In recent years credit unions have been increasingly targeting people of all incomes, and many have branched out into current accounts, mortgages and other products.

Despite support from many quarters, credit unions have remained relatively low-key in Britain. But membership is on the rise: the number of adults who belong to one in the UK has reached 1.92 million, which is a new record, according to the Bank of England’s latest data. However, the number of “juvenile depositors” (that is, children and young people) has been falling steadily for some time and now stands at 212,000.

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

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However, lots of people who have essential borrowing needs, such as meeting unexpected costs, cannot access or afford existing forms of credit. Some could afford to pay back a loan over time but not the often high levels of interest that may be involved.

As a result the government provided Fair4All Finance – a not-for-profit organisation set up in 2019 – with £3.8m of funding to pilot a “no-interest loans scheme” aimed at people in this situation.

The first stage of the pilot is now under way. Since January, South Manchester credit union has been offering no-interest loans of between £100 and £2,000.

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Customers may be eligible in situations in which they are turned down for a standard loan with interest because of affordability reasons, but removing the interest makes the loan affordable. Or it may be that they have been excluded from access to credit but their circumstances have changed, meaning their credit score should not be a barrier to lending.

“So far, the average loan value has been £490, with reasons for loans ranging from paying for driving lessons and upfront nursery fees to enable customers to get back in to work, to funds for housing deposits and to buy school uniforms, essential furniture and white goods,” says Fair4All Finance.

The average loan term is 12 months, but the South Manchester credit union says it can go up to a maximum of 24 months for the larger loans. Most of the applicants had poor or very poor credit scores, yet to date, 94% of repayments had been met, it adds.

Officially, South Manchester credit union’s no-interest loans pilot has finished, but “we’re still doing them”, says Sheenagh Young, its chief executive. “We named it the Stepping Stone loan.”

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Those who have taken one out include Zainab, 43, a mother-of-three who had moved into a new home after domestic violence. The property was largely unfurnished and she needed a loan to buy carpets, beds and bedding. Her credit rating was damaged by recent utility company defaults linked to her having fled her previous home. Her income was limited, too, but the credit union was able to offer her a £300 no-interest loan to get carpets fitted, and referred her to some local organisations to help with the beds.

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A wider pilot rollout is due to begin later this year.

A separate scheme to test out a prize draw savings account called PrizeSaver ran between late 2019 and early 2021. This proved a success, and 16 credit unions around the UK – including South Manchester, London Capital, Clockwise and Plane Saver – are continuing to run PrizeSaver.

With this, every £1 in your PrizeSaver account at the end of the month gives you one automatic entry into the following month’s draw. You get a maximum of 200 entries a month, even if you have more than £200 in savings. Every month, one person belonging to one of the 16 credit unions wins £5,000, 10 savers win £50, and 10 win £20.

The upcoming financial services and markets bill is set to include a provision enabling credit unions to offer hire purchase and conditional sale agreements (similar to hire purchase) to their members. This means that, like their counterparts in the US, they would be able to offer products such as car finance.

Five credit unions have gone under since January, though some in the industry say those that cease trading often tend to be small, 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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