Can credit unions really put pay-day loan companies out of business (even with the church’s help)?

I am apparently not alone in being appalled at the interest rates charged by pay-day loan companies like The Archbishop of Canterbury has said the Church could do more to help non-profit lenders to compete with such firms. The Most Reverend Justin Welby wants to see skills of members of his congregation, as well as Church premises, used to assist the advance of credit unions. I’m sure many people, not just Christians, will applaud the sentiment but can such a scheme be successful?

So what are credit unions? They are simply financial co-operatives, owned by the people that use them. Generally, membership of an individual credit union is restricted to those who live and work in the local area. They may also be affiliated to a workplace or organisation- so only people who work there can join – or a trade union, a religious group (hence the Archbishop’s comments) or a housing association.

First and foremost they are a ‘savings club’ and members are encouraged, to save rather than borrow. They can pay the money in at local offices, some newsagents, collection points, directly from wages, or through a standing order or direct debit. Like other financial services these savings are protected, up to £85,000 if the credit union were to go bust.

Credit unions can lend money to members, but the amount they lend does vary. Some will only lend up to £1,000, but some of the bigger ones may offer larger loans or even mortgages. They are set up to offer loans at affordable rates, so can only charge a maximum of 2% a month (or 26.8% APR which may still be more than some credit cards). That means a £500 loan with a credit union repaid over six months will cost no more than £36 in interest.

So how does that compare with a pay-day loan company? Some of the differences are obvious: there is no membership requirement for a pay-day loan; there is no facility to save with them; and interest rates are poles apart – a loan of just £125 for 45 days with (i.e just one quarter of the credit union maximum example) incurs interest of over £64!

Lending money however isn’t just about the interest rates you set. Any loan involves risk and in order to assess that risk you have to collect data and analyse it. The less data you collect, the more risk is involved and that’s a massive difference between credit unions and pay-day loan companies.

As a member of a credit union they will no doubt have historical data about you even before you apply for a loan including if and when you’ve saved with them and how much it was. Then, when you do apply, I have no doubt they collect even more information about you and your financial liabilities probably in a paper-based application (someone correct me here if I’m wrong). That allows them to make a considered decision about whether to lend to you and if so how much to lend over what period. I would imagine that process takes days or even weeks. The chances of fraud or a default borrower being credited under this system are not eliminated but they are very, very low.

Pay-day loan companies have hi-tech website that take basic details from you and probably only check that data against the standard credit rating agencies and possibly the voters’ register. By the very definition of their business they don’t take the time to check much else. I am told some loans are approved in less than 15 minutes and then they electronically credit your bank account for you to spend the funds instantly. That process is extremely high risk, vulnerable to both fraudulent applications and borrowers who don’t pay the money back. Whether we find it palatable or not, the money to cover fraud and defaulters has to be found and so it goes towards assessing their interest rates.

Clearly there is a need for loans at the speed at which pay-day loans companies can deliver it otherwise they wouldn’t exist. I am hugely in favour of those who need money urgently being able to get it at interest rates that are not extortionate but I just can’t see credit unions under the current system pulling it off in the required time-scales and keeping their interest rates down to 2% a month.

The government wants to extend the interest that credit unions can charge to 3% a month (42.6% APR) and hopes that, alongside £36m in extra funding, the membership of credit unions will double to two million. I hope this helps but I’m still not convinced we will see hugely successful firms like collapse in the near future.

4 thoughts on “Can credit unions really put pay-day loan companies out of business (even with the church’s help)?

  1. Interesting – I’m sure that the Archbishop has good intentions and it will be a start if the Church of England stops investing in companies like Wonga. A big departure from Church thinking on this issue; didn’t Jesus physically scatter the money lenders from the temple in Matthew – not set up in competition with them? In fact I’m sure that the Church forbade people from lending money for profit. Jews, on the other hand, were barred from some professions so they became money lenders often acting as middle-men to mask the true source of the funds. Not good for early community relations if Christians owe a lot of money to Jews. Presumably if there is a pogrom a lot of debt gets wiped off. If Wonga is forced out of business, is the Church going to pick up all of this fairly toxic debt, either directly or indirectly? If not, and Wonga and similar companies (that are at least regulated) are forced out of business, it may force people into the clutches of illegal loan sharks. For someone who is desparate enough to go to Wonga, an APR of 40 % is still fairly usurious. And to what lengths is the Church prepared to go in order to enforce these loans? If they are not going to be quite tough how will they protect themselves from being exploited? I suspect this is just political lobbying on the part the new Archbishop – in the end they might be better advised to invest their money in charity and community work, which is less fraught with pitfalls, and an area which they excel at because they have great experience and because it is much easier to mobilise the congregation for a soup kitchen than it is for a money lending operation.

  2. All good points Paul. I’d always thought that Jesus threw the money-lenders out of the temple because they were in the temple not because they were lending money but you might be right in your interpretation. I agree the whole thing is a big departure from church thinking and might be a political move by a new Archbishop. He was an interesting choice to run an organisation steep in historical methodology (some would say ‘living in the dark ages’!) Given his business background I can’t help thinking he will have more changes of direction in mind.

  3. He definetly has a colourful business background in Africa. He has German – Jewish ancestory and is supportive of the ordination of female clergy so I’m sure he will represent a break with the past. On the other hand, he was educated at Eton and Cambridge. You are right, it was because they were in the temple conducting commercial activities along with sellers of doves and cattle merchants (turning it into a den of thieves). He seems to have been particularly annoyed with the money lenders, turning over their tables, which I believe is the only time Jesus is physical in the bible. I guess Welby’s proposal is just the modern day equivalent of this. I guess a lot is open to interpretation and translation.

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