UK Credit Unions Sell Short-Term Loan Alternative

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One of the short-term lending behemoths in the UK, Wonga, may soon have some competition from credit unions. Wonga, whose short-term payday loans often have annual percentage interest rates of 4,214 percent, have been alleged to create cycles of debt for borrowers.

In response to these alleged usurious rates London Mutual Credit Union has begun offering short-term one-to-three month loans, which carry interest rates of 26.8 percent. The credit union claims that borrowers can obtain “cash when you need it quickly” with their new short-term loans, according to the Guardian.

London Mutual charges £8 (approx. $12) interest on a 30-day loan of £400 (approx. $640) while Wonga charges £125.48 (approx. $199) interest on top of fees. The credit union also does not impose penalty fees.

While London Mutual has certainly created an affordable alternative to payday loans, their availability is limited by location. The credit union is only offering this financing to people who reside in the London Mutual catchment area, which only covers three boroughs of London. Besides the location and proximity requirement, London Mutual runs credit checks on applicants before deciding whether to approve or reject them for short-term loans. The credit union also charges a membership fee.

Lucky Chandrasekera, chief executive at London Mutual, claims to have completed 1,500 payday loans. The credit union predicts a lending increase in December.

“We started offering them after seeing, on the bank statements of people applying for our longer-term loans, huge payments going to the payday loan companies. It’s not just people on very low incomes who apply. We’ve seen people on £40,000 or even £50,000 a year who apply,” said Chandrasekera, according to the Guardian.

London Mutual is joined by several other credit unions in the launch of new types of financing designed to compete with payday loans.

Glasgow Credit Union offers short-term loans with interest rates of 14.9 percent on financing amounts from £500 to £3,000. Moneywise credit union has begun offering loans with 2 percent interest a month. Current members can get even lower interest rates. At Hastings and Rother Credit Union £67.65 interest is available on £500 short-term loans.

Hopefully similar types of financing will spread from the UK credit unions to their counterparts here in the US.