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Should credit unions be more outspoken against exploitative schemes such as payday loan companies?

Zoe Cannon


The payday loan industry is currently occupied by 20-30 companies. In comparison, there are around 277 credit unions in the UK. Yet, many people still feel their only hope for financial support is via a payday loan company. 

Did you know around £1.3 billion is borrowed from payday lenders each year, with consumers forced to repay a total of £2.1 billion? That means £800m is paid in repayment fees alone.


Why do credit unions exist?

On the surface, as a credit union, you are there to provide similar services to that of a traditional bank. However, credit unions maintain their strong community ties by putting all profits back into the institution to offer lower rates to people who may require the safety net of a small loan over a longer period of time. 


With a combination of services to that of a traditional high street bank and payday companies, credit unions are an ideal payday loan alternative. For example, the average loan amount of a credit union member is just £2,806, much lower than the average of £50,400 from a high street bank member. The smaller amount allows more flexibility for borrowers. 


But, more than just the services and support that you offer to your members, credit unions also exist to call out exploitative schemes, such as payday loan companies and loan sharks. These businesses take advantage of vulnerable people, desperate for a quick loan to tide them over until payday. With higher interest rates, unfair repayment terms, often over a short period of time, and the need to take out another loan to cover your original loan, it can be a fast debt spiral for many people.


Financial inclusion

Did you know one in four UK adults will face financial exclusion at least once in their lifetime? These are people who have not been able to open a bank account or take out certain financial products. These can include credit cards, insurance and mortgages based on their credit history, income or lifestyle.


Recent statistics from the year 2018/2019 show that there are nearly 1 million unbanked people in the UK. As a result, many people feel they have no option but to go to a payday lender to take out a loan or credit card. 


In the Government’s latest financial inclusion report, published in 2020,  it revealed its progress towards achieving financial inclusion was focused on ensuring consumers have access to useful and affordable products and services, and improving financial capability and resilience. Step in credit unions and responsible lending.


Promoting responsible lending

As community-based organisations, credit unions are at the forefront of responsible lending. Unlike banks and payday lenders, you see those who need support as members. They’re not customers who are simply part of a transaction. 


Loans are also fair and only the amount that you know your members can afford to repay. Interest rates are also regulated. For example, credit unions can charge up to 42.6% APR, whereas the average APR for a payday lender could be up to 1,500%. 


Rather than letting your members take out loan after loan, you support your members into better money management habits. Plus, you teach them to save too.


Responsible lending is at the heart of every credit union and we’re standing alongside them against these exploitative schemes.


How credit unions can be more outspoken against payday loan companies


Highlight the dangers of payday loan companies

Credit unions are taking several actions to educate members on the dangers of payday loan companies. This can be done by creating a useful guide to share with your existing members. They may even pass it onto people they know. This way, more people can be made aware of the dangers of payday lending. Plus, more people can learn about the benefits of becoming a member of a credit union.


Lobby for tighter regulation of the payday loan industry

Credit unions are taking on the payday loan industry head-on by joining together and continuing to lobby the government and the FCA to review its current measures and introduce tighter regulation. The industry is regulated, and there are currently price caps on high-cost short-term credit companies. The FCA stepped in in 2015. They found that payday lenders were not taking proper consideration into a person’s affordability and ability to pay back loans. 


The new regulation includes interest and fees not exceeding 0.8% per day, and not having to pay more in fees and interest than 100% of the borrowed amount. However, this doesn’t go far enough, and still results in too many people getting into debt. 


By joining together to form an association, promoting good financial practice and responsible lending, credit unions across the country are continuing to reach more people than just their local community, and those who are already aware of credit unions.


Mitigate risks with fair loans

Credit unions can continue to be outspoken when it comes to transparency and affordability checks around loans. While payday loan companies do undertake affordability checks, to mitigate risk, the end result for their customer is often a higher repayment fee and a shorter timeframe for paying back the loan.


Mitigating risks and greater affordability insight is an area we’ve been supporting the credit union sector with too. Through our Data Analytics software, powered by CUFA, and our Open Banking solution, powered by Credit Kudos, we’re empowering credit unions to make more responsible and informed decisions about lending. 


With our innovative Data Analytics solution, credit unions can determine the risk profile of their loans and calculate risk-based pricing. With our Open Banking solution, credit unions benefit from real-time data and insight into their members’ creditworthiness, so you can mitigate risks with responsible lending. 

Are you a credit union that wants to join the digital financial revolution and create a fairer world for those financially excluded? Get in touch today.