A Government report this week expresses concern that the cap on the interest rates credit unions are allowed to charge makes their business model at risk of being unsustainable. They can only charge 2% interest on loans per month which may may that small loans are loss-making due to the fixed administration costs associated with making the loan. It’s thought that increasing this figure to 3% per month would help to reinforce the business-model and therefore encourage greater lending to people that might otherwise have become victims of extortionate payday loans or doorstep credit.

High-cost credit is increasingly pushing people into a debt management plan or even more serious insolvency measures including an IVA, Scottish trust deed or even bankruptcy. People are often accumulating numerous payday loans as they obtain one loan to pay another, while perhaps rolling over other payday loans repeatedly at the same time. The end result is a financial position which is neither manageable or sustainable. DMP firms are finding more and more payday and doorstep lenders featured on the creditor lists of their clients.

Could credit unions play a role in helping people to avoid these pitfalls? Many people think that others only use high-cost credit because they are unaware that affordable credit could be available from a credit union.

Perhaps even more importantly credit unions could play a role in preventing people from ever getting into the type of debt that leads to debt management plans at all. The reason for this is that credit unions typically require some form of regular saving as well as offering loans. High-cost credit is often used when a financial emergency arises, but holding a financial buffer at a credit union could cut off the need for high-cost credit at source in many instances.

It’s therefore clear that credit unions might play a role in encouraging better financial management, helping people to create a savings buffer, and providing loans at affordable rates if the need arises. This would certainly help to restrict the number of people using a debt management plan, but only if sufficient numbers of people can be persuaded to join a credit union at all. Currently less than 3% of the UK population have an association with a credit union currently.

Giving credit unions the financial ability to offer more small affordable loans might encourage membership numbers to increase. More importantly there needs to be a concerted publicity campaign to educate people about the benefit of credit unions and to direct them towards one locally for which membership is available to them.