Deduction loans, where repayments are taken from credit union members’ benefits or employment income, have been found to boost credit unions and provide a high level of satisfaction for their members, says a report from Fair4All Finance.
Fair4All commissioned the study in partnership with the Financial Inclusion Centre and Swoboda Research Centre to find out how well deduction lending works for low-income borrowers, lenders and employers, where there might be opportunities to improve and grow the offer, and how the model can impact savings behaviour.
The survey of more than 7,500 people across seven credit unions found that 97% of benefit borrowers and 95% of payroll borrowers were either ‘very satisfied’ or ‘satisfied’ with their loan.
The study also found that the loans had a positive impact on borrowers’ ability to save. 73% of benefit loan users and 72% of payroll borrowers reported they had been encouraged to save more regularly, with the help of an automated savings account set up alongside their loan repayment.
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The payroll deduction model has been in use by credit unions for some years. More recently, this model has been applied to non-means-tested Child Benefit, often known as Family Loans.
According to the survey, payroll loan users and standard loan users are generally similar in their demographics. However, benefit loan users have a very different profile. The majority are young women, who are mostly single, support more children, live in rented housing, and have significantly lower incomes and are less likely to be working.
These loan users were found to have fewer traditional borrowing options available to them, such as overdrafts, loans from bank or building society loans and credit cards, when compared to payroll loan and standard loan borrowers.
Some interviewees raised concerns about using child benefit as a repayment method, with the worry it could divert funds away from the household that should be used solely for spending on their children. However, the survey results show that the loans were largely used for family-related expenditure.
One of the potential risks associated with automatic repayments for both benefit and payroll borrowers is that it could be ‘masking’ customers in financial difficulty. However, Fair4All’s research showed that the level of those in difficulty were broadly in line with standard loans borrowers, 7% of payroll loan borrowers and 9% of benefit loan borrowers.
Fair4All investment director Holly Piper said the research shows that “when delivered appropriately, payroll and benefits loans are good for borrowers who might otherwise have limited alternatives to using high-cost credit or illegal lending. Additionally, this type of lending can encourage positive money management and regular savings – building financial resilience.”
This type of lending can also benefit credit unions, said Piper, enabling them to lend to more members, with lower default levels, due to automatic payments.
“We believe there’s a real opportunity for more credit unions to scale up their provision of affordable credit to many more people through such products, especially if the sector as a whole works closely with key stakeholders including debt advisors to explain the positive impacts these can have,” added Piper.
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One of the seven credit unions taking part in the study was the Co-op Credit Union, which currently has payroll partnerships in place with a number of co-op employers, including the Co-op Group, Midcounties, Radstock and Southern co-ops.
Matt Bland, CEO of the Co-op Credit Union said: “The Co-op Credit Union is proud to have participated in this ground breaking research which demonstrates what credit unions have known for many years – that deduction-based lending is a safe, secure and inclusive way of supporting some of the most financially vulnerable in our communities. Members overwhelmingly appreciate the convenience and automation of deduction lending as well as how it delivers significantly cheaper credit than they can otherwise access.
“We are keen to do more to deliver our deduction lending services – complete with crucial linked savings products – to help co-ops and retailers support their colleagues’ financial resilience at a time of unprecedented pressure on household incomes.”
A number of recommendations are made in the report, including that credit unions work with HMRC, local authorities, DWP and employers to to enable benefit deduction loans to be offered more quickly and more widely.
This article has been amended. An earlier version wrongly listed Central Co-op as one of the co-operative retailers which have a payroll partnership with the Co-op Credit Union
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