The cost of borrowing – credit unions as an alternative to unethical sources of finance

As the hard times get harder, action is being taken to keep financially vulnerable people out of the clutches of loan sharks and payday lenders

Credit unions around the world are doing their bit to help with the cost of living crisis by providing low-cost loans.

A March 2022 report by the Centre for Social Justice, an independent UK think-tank, identified credit unions as a key player in the affordable finance ecosystem which could help vulnerable people. It found that 62% of those who became victims of loan sharks had an income of below £20,000 a year, with about half of this number on less than £15,000. It also revealed that 66% also had debts owing to legal creditors and 75% were on benefits.

In June, Bank of England figures showed that credit card borrowing had risen by £740m month on month,13% higher than the year before and the biggest year-on-year rise since October 2005.

And research by SmartMoney found that two in five UK adults will take out a new form of credit in the next year, and they predict they will need an average of £5,250 each. 

The Co-op Credit Union in Manchester has raised concerns about the mental and physical health impact of the crisis. A recent survey of its members found two-thirds of respondents were either “very” or “extremely” worried about the cost of living; 14% had skipped meals, and another 14% had used all their savings. Around 8.5% reported difficulty with debts. These challenges have left their mark, with 57% reporting a deterioration in their mental health.

In light of these challenges, 54% of respondents acknowledged the value of their credit union membership, saying that its services have helped them through the crisis so far. 

Related: Credit unions provide a lifeline through the cost of living crisis

Matt Bland, chief executive at the Co-op Credit Union, said: “These survey results paint a sobering picture of the real-life health impact that the cost-of-living crisis is having on our members, the majority of whom are earning low incomes in part-time retail work. 

“The recent announcement from government on freezing energy unit prices is of course a very welcome intervention. But our survey reflects the impact that the increases we’ve already seen are having on our members’ lives and those of their families. This suggests that more targeted support is needed for the poorest.

“It is very encouraging for us to see the positive impact our services have for people struggling to cope with a once-in-a-generation crisis. We are doing everything we can to support members through our core savings and loan services as well as providing tools and support to help people budget and maximise their income through benefits and tax credits.

“We call on government and its agencies to do everything it can to support those on low incomes to find a sustainable way through the crisis. We also call on government and bodies like Fair 4 All Finance to consider what they might do to help credit unions and other social lenders to expand their services to support low-income households. In many ways, the current crisis is more damaging than Covid-19 was for low-income households and we need a response on an equivalent scale.”

Similar concerns were expressed by Leeds Credit Union, which warns locals not to turn to unethical lenders. “We are acutely aware of the challenges facing many members of society during these tough times,” it said. “As a long-established credit union, we are used to supporting our members throughout challenging periods and proudly continue to do so today.

“If you or someone you know is struggling financially, we would advise you to talk to your local credit union as soon as possible. As well as providing a range of financial products at reasonable and affordable rates and savings accounts to help build financial resilience, credit unions offer holistic help and advisory services that can help anyone at risk of becoming financially vulnerable.

“Under no circumstances should you turn to unscrupulous lenders or loan sharks.”

Debt is also a concern in Ireland, where an annual school-costs survey from the Irish League of Credit Unions (ILCU) found that parents are spending an average of €1,195 (£1,045) per primary school child, €9 (£7.87) more than the previous year. Around 89% of parents said the rising cost of living had impacted their income or household costs.

And 61% said the increasing cost of food for school lunches was having the biggest impact on their budget. Around 9% of respondents said they would consider a payday loan company, with one in 10 (8%) of parents knowingly considering an illegal moneylender. A quarter of all respondents in this group didn’t know if their potential moneylender was legal or not.

ILCU head of communications, Paul Bailey, said: “The rising costs of living will heavily impact households across Northern Ireland this winter. This is evident by the sharp increase in parents cancelling extracurricular activities and sacrificing the family holiday to meet the costs of back to school. What is particularly concerning is the increase in the number of parents reporting that they will go into debt to send their children to school.  

“I would urge parents who feel they have no alternative to a moneylender to talk to their local credit union about accessing more affordable and ethical forms of finance.”

In the USA, new legislation is being considered to protect consumers from debt. Congresswoman Carolyn B. Maloney has introduced the Overdraft Protection Act, which would limit the number of overdraft fees banks can charge to one per month and six per year. 

But the Credit Union National Association (Cuna) is critical, warning a curb on fees would limit credit unions’ ability to help members.

Cuna president/CEO Jim Nussle wrote in a letter to the committee: “The best and least disruptive path forward would be to continue permitting transactions to be processed and encouraging affected consumers to reach out to and work with their local credit union to reduce or eliminate any fees or to consider other low-cost products and services. Relying on credit unions to do what they do best is preferable to an environment where consumers are getting declined in line at the grocery store or pharmacy or experience their rent check unpaid.”

The National Federation of Federally Insured Credit Unions (Nafcu) also opposes the bill, arguing that “any legislative efforts that eliminate overdraft protection programmes are likely to have a significant negative impact on borrowers who value these programmes.”

Back in the UK, some credit unions are partnering with charities or providing training on how to manage budgets. Bradford District Credit Union (BDCU) recently backed the FoodSavers campaign run by Inn Churches, a council-funded project which has 10 outlets around the city offering low-cost food with members able to save into their BDCU accounts. Members have so far saved over £4,000.

A financial wellbeing project funded by Somerset Council has also involved credit unions in the county and works to give people the tools to understand and manage their finances better.

Through the scheme, charities, organisations and credit unions offer free expert and confidential help, with free information, events, and training to local residents and employees of Somerset businesses who face financial anxiety.

The initiative is backed by Westcountry Savings & Loans, Great Western Credit Union, Somerset Community Credit Union, and Mendip Community Credit Union.

Similarly, Wave Community Bank in Hove, UK, runs webinars to provide free tips to members on how to manage monthly budgets, control their debt and check what benefits are available.

But credit unions also worry about the impact of the crisis on their sustainability.

Robert Kelly, CEO of the Association of British Credit Unions (Abcul) said: “Abcul is acutely aware of the potential seismic negative impact that the cost-of-living crisis may have on our member credit unions and the individual members they serve across. 

“We are devising a strategic lobbying plan that will include discussions and negotiations with a range of stakeholder groups and direct input from member credit unions on how best to shape our messaging and support services. 

“As always, Abcul stands ready to support our member credit unions in building and maintaining financial resilience. Our sustainability will be a critical factor in our future success but there is no doubt that the months ahead will create significant challenges to the credit union sector as a whole.”