credit unions: a loan in your own back yard?
Credit unions. Always a bit of a mystery to me. An obscure part of some urban sub-culture. Almost the corner-shop of the lending world.
But a flyer dropped through my letterbox yesterday, one of those local news-sheets still produced in this world of websites and digital media.
A second credit union has just set up shop in the little rural town where I live, apparently. News to me. I wasn’t even aware of the first, so I kept reading.
I’ve just written about Zopa, the rapidly growing social lending site, I wondered how credit unions compared. After all these are local community driven, low overhead enterprises.
Would they be as competitive as Zopa?
Just what is a credit union?
Credit unions exist all around the world. Most communities will have one in some form. Much smaller than banks, they provoke a micro finance service, typically operating under a not-for-profit umbrella with a preferential tax status.
In the US, France and Spain, they have a more mainstream appeal and can be capitalised to an average level of $90 Million. Small, but significant all the same.
Credit unions have a similar operating model to Zopa. People with money to lend are connected to people who want to borrow. Credit unions operate a member scheme and charge a small enrolment fee. About Â£3.00 in the case of my local union.
All loans are provided “subject to status”, but I can’t help wondering just how diligent such enquiries could really be, given their position in the financial world.
But I was interested in something else. Credit unions aren’t as constrained and regulated as a bank, so I was wondering what they charged and what level of borrowing was typical. And this is where I got a surprise.
A creditable performance?
Its unreasonable to have an expectation without knowing just how a credit union operates. But without shareholders and mostly staffed by volunteers and money supply via savings schemes, the signs were good.
I was shocked to see rates nowhere near Zopa’s rates, or a high street bank for that matter.
My local credit union charges 2% per month, that work out to be an APR of around 26.8%. That’s apparently typical of credit unions.
Loans are typically around the Â£500 mark, but can extend up to Â£10,000. Cash withdrawals from savings are subject to 48 hour notice and a direct to bank account option is available.
My local union offers an SAYE scheme direct from payroll.
A refuge of last resort?
Credit unions are not trying to be mainstream lenders. They’re designed to act as a safety net for borrowers who may otherwise turn to doorstep lenders and loan sharks, so in that respect, you could say they provide a service.
That rate doesn’t seem to reflect the union’s non-profit status. Surely even if they offered a 5% savings rate, bettering the high street, loans at 7 or 8% would be reasonable?
A chance for credit unions to be reborn?
The banking crisis and the new social awareness encouraged by Government offers a real chance for communities to cooperate in offering finance to local communities.
Surely its possible to create local schemes to provide micro-finance at a reasonable rate?
Could we see something emerge supported by local government as a community project. Would that be too much to hope for?