Payday lenders vs credit unions

There are approximately 400 credit unions in Britain, Scotland and Wales and approximately 2% of the adult population utilizes their services. Compared to the 46% of consumers in the USA, this statistic is very low. Why would Credit Unions not be more popular when in essence they solve many of the problems that borrowing from a payday lender would create if you were borrowing more than you could pay back in the short term.  In effect that is where payday loans turn sour, and generally people who end up not being able to pay back a payday loan knew that before they took out the loan in the first place. Credit Unions should be able to clear up this, and many other problems that the less privileged in the UK face.

How do they work? The word Union describes idea behind it. Credit Unions are basically much like a bank, only owned by you, the member (essentially customer). Usually a Credit Union will be a co-operative of people who live and work in the area where they are found. They can also service a company or association. Credit Unions have heavy backing from the church as they often service communities that include church activity. The Arch Bishop of Canterbury, Justin Welby, is a great supporter of Credit Unions on the whole, and his aim is to see much of the debt caused by payday loans shifted and people rather finding solutions in a Credit Union.

Credit Unions charge lower rates on short term loans than any other financial institutions. Currently they can charge up to 2% a month (26.8% APR), however the government has intentions to increase the rate to 3% per month in the near future as some establishments are finding it difficult to compete with marketing and online services.

So what could be the problem?  So far everything sounds great. The cheapest loans in town, why isn’t there a stampede toward the doors. First of all, upon becoming a member, one is encouraged to save before lending. Presumably because as Credit Unions don’t run on that much profit, there isn’t a huge supply of money to back the business.  Secondly the return on savings is dismal. So dismal that it isn’t worth saving in a Credit Union at all. To boot, the return on your savings is generally only announced at the end of the year, so you never know what you are going to get.

If Credit Unions were to re-think their strategy however there is solid proof of their projected success. The Gateway Credit Union offered 1.75% on savings last year and the stampede came through the doors. The result was that the Union suddenly had the capital that is essential to grow the company and compete in the market place. Unfortunately, due to being “swamped” they felt forced to close the offer down.

Now if you are a small fish and you want to be a big fish, then you have to swim with the big fish. Payday lenders must be doing something right, filling a space in the market place or they wouldn’t be there. Take a deep breath Credit Unions and get in and swim.