credit unions: a loan in your own back yard?

By in banking, general, management, products, social networks, strategy on Friday, 15 October 2010

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 £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 £500 mark, but can extend up to £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?

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