In 2011, Colleen Beasley took out a loan for several hundred pounds. It was, she says, an emergency. After a six-week benefit delay, she was living on 25p packets of pasta and struggling to buy enough nappies for her two-year-old daughter.
“It was really hard for me to say no,” she says. “I was a single mother living alone with my daughter, facing eviction and with no family to help. But the money is only in your hands for a second before it is gone.”
Beasley started paying back the loan in weekly instalments; initially £39, but she soon found this unmanageable and reduced the instalments to £20. At the same time, the lender would call to offer immediately accessible top-ups. Beasley never paid back the loan; by the time a friend intervened to pay off “the spiral of debt” last summer, the amount owed was well over £1,000.
Beasley would no longer be able to take out a legal loan on these terms. The new price cap on payday loans introduced on 2 January means that all short-term credit is now capped at a daily rate of 0.8%, default charges cannot exceed £15 and the maximum paid back cannot exceed twice what the lender borrowed.
But what will happen to the 70,000 potential borrowers that the Financial Conduct Authority (FCA) estimates will no longer be able to access this type of credit? They will fall prey to illegal loan sharks, says the payday loan industry body, the Consumer Finance Association (CFA). It points to research by the consultancy, Policis, on payday lending in the United States, where 45 states have a price cap on short-term loans and 60% of such borrowing is unregulated.
Others point to the rise of credit unions. In Ireland, 63% of the population belong to a credit union and membership has increased since the financial crash. There are now 462 credit unions in the UK, with 1.1 million members; less than 2% of the population. Unlike in Ireland, where they were developed for people in rural areas with little access to credit or savings, here we have a much more competitive financial services landscape. Beasley has now joined the London Community credit union; the same one I recently joined. It is a risk; like any financial institution, some credit unions fail – 10 have done so since April 2013 – but unless I invest more than £85,000, I am covered by the financial services compensation scheme.
The CFA says credit unions have not proved themselves credible or robust enough to act as an alternative. But they are changing. In May 2012, the Department for Work and Pensions published a report that said the sector was “not financially sustainable” because of high cost structures and low interest rates. Since then the government has signed a £38m deal with the Association of British Credit Unions (Abcul) to modernise the sector. It has also increased the monthly cap on interest rates they can charge from 2% to 3% to help credit unions generate both more income and lend to members with a higher risk profile – although Abcul has as yet no figures on numbers of new high-risk borrowers.
To generate more income, credit unions also need to attract more customers on a regular income, like me. Abcul’s aim is to attract a further one million members by 2019. Traditionally credit union services were slow and inconvenient, but now I can access my money instantly on the phone or online, around the clock. I can open a current account, savings account, or choose from a variety of loans and insurance policies. I can stop my money being used to fund environmental destruction or human rights violations and vote for the board of directors, or stand for election myself; all directors are also approved by the Prudential Regulation Authority.
Unlike a building society or bank, members of a credit union must share a common bond; something that unites them, such as a location or a trade. I could only join London Community because I live or work in Tower Hamlets or Hackney, in east London.
Glasgow credit union was started 25 years ago to service the employees of Glasgow city council. It is now the largest in Britain, both in terms of assets and membership. Of its 36,000 members, 600 have used the union to take out a mortgage, a service now on offer at three credit unions elsewhere. Shortly before Christmas, these members became the first in the country to receive a mortgage rebate; at 5% interest, they received several hundred pounds each.
London Mutual, another credit union based in the capital, is the only one openly advertising “payday loans”. First time customers can borrow up to £400 on the same day at a 3% monthly interest rate. If a borrower took out £100 over 30 days, they would pay back £103, well below the £124 they would have to return under the maximum interest that payday loans can charge under the new cap. London Mutual does not levy any additional fines for early or late repayment, but borrowers must be earning more than £12,000. Other credit unions, such as my own, do offer small short-term loans to unemployed people, but, says general manager Colin Eddy, it does not give out loans to someone who it believes “will be disadvantaged by it”.
Mark Lyonette, chief executive of Abcul, says that credit unions are “not an immediate answer” to payday lenders. The answer, he believes, is preventative – to create a longer-term, “responsible alternative”. My own credit union hosts free money management advice sessions for members who are not eligible for a loan.
The Church of England is getting involved too. In July 2013, the archbishop of Canterbury, Justin Welby, told Wonga the church would “try to compete you out of existence” – although it was later found to have a £75,000 stake in the company. Since then, the church has removed the investment and launched To Your Credit campaign to promote the growth of credit unions and other community finance organisations. It is mobilising church-goers to join up and is promoting debt advice services and money skills courses, with plans in place to launch a network of credit union-run savings clubs in primary schools connected to the church.
Sir Hector Sants, head of the FSA throughout the financial crisis, was appointed to lead the campaign. He says: “To be fully effective the sector will have to grow both in terms of capacity and capability, and helping them to do this is a key element of the church’s initiative. ”
Beasley discovered her credit union through St John’s church in Hoxton, London. She says: “I needed some encouragement to join up – it wasn’t as if I had never heard of credit unions, but I hadn’t grasped how they might serve me. I thought their services were much more limited than a bank.”
She has also joined the Just Money campaign, to make financial institutions work for communities, co-ordinated by community organising charity Citizens UK, which built an alliance of Christian, Jewish and Muslim leaders who first called for the cap back in 2009.
Beasley says she is now “shying away from loans” and is exploring which of her credit union’s savings accounts she should open.
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