Rate move helps credit union loans

Credit unions will find it easier to offer affordable short-term loans from next year under Government plans, enabling low-income borrowers to become less reliant on payday lenders.

New legislation will be introduced this autumn which will increase the maximum interest rate credit unions can charge on loans from 2% to 3% a month, with effect from April 1 next year.%VIRTUAL-SkimlinksPromo%
Current rules mean credit unions often end up making a loss on shorter-term loans of under £1,000 due to the admin costs involved.

A recent Department for Work and Pensions (DWP) report said up to seven million low income earners who pay a "poverty premium" for credit from lenders including loan sharks and the payday lending industry could be helped by the growth of credit unions.

The higher cap will not be compulsory and credit unions will be able to choose whether they want to increase loan rates. It will make it easier for credit unions to lend to people who are seen as more high risk and offer a wider variety of products.

Even with the cap increase, credit unions will still be substantially cheaper for borrowers than comparable forms of credit, the Government said.

A credit union charging 3% per calendar month on a £400 loan over one year would result in a total repayment of £477.36, or £19.34 per £100 borrowed.

Payday loans are not directly comparable as loans are meant to be paid off over a month rather than a year, although payday lenders have been found to typically charge £25 per £100 borrowed over the course of a month. If the loan is rolled over, the cost doubles to £50 per £100 borrowed over the course of two months.

Credit unions are mutual financial co-operatives that take deposits and give loans to members. The sector in Britain is still relatively small compared with other countries such as the United States and Canada.

The Government is encouraging its growth to help people who often find themselves shut out of mainstream borrowing.

How to dispute your credit record
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Rate move helps credit union loans

Don't wait until you need to apply for credit to view your credit record – do it now so you know where you stand and can deal with any disputes. When applying for credit, you give the lender permission to view your record, so it makes sense to view it yourself first.

You can access your record via any of the main credit agencies in the UK. By law, all the credit agencies are required to provide you with a one-off copy for just £2 so don't be hoodwinked into signing up to pay a monthly fee.

Your report shows what credit accounts you've had and whether you've made repayments on time and in full. According to Experian, items such as missed or late payments stay on your credit report for at least three years, while Court Judgments for non-payment of debts, Bankruptcies and Individual Voluntary Arrangements stick around for around six years.

Your credit report shows the current address at which you are registered to vote as well as details of other addresses you've been linked to in the last six years. Another section lists people you have a financial connection with, such as a joint mortgage. When you apply for credit, lenders are able to look at their credit history as their circumstances could affect your ability to repay what you owe.

Scrutinise your record to make sure there are no mistakes. Even a minor error such as an incorrect address or wrongly linked account could hinder your chances of being approved for credit so make sure all your details are correct and that all your borrowings are on record. If there is a discrepancy, contact the three main credit agencies to get it corrected.

A default notice is note that a lender puts on your credit file if you fall behind with your payments. It is a warning sign to future lenders about your reliability to repay credit and could mean that they will be less likely to lend to you or will increase the interest rate.

If the default notice is incorrect, perhaps because you have repaid the loan in full or did not take out the credit and suspect that you have fallen victim to fraud, you can apply to have a default notice removed. A default notices will only be removed if it is factually incorrect – not simply because you are embarrassed by it.

Start by writing to the agency asking it to either remove or change the entry that you think is wrong. It will investigate the matter and find out whether you have been the victim of ID theft or a bank's mistake.

Within 28 days from receipt of your letter the agency should tell you how the bank has responded. If the bank agrees to change the entry, they will authorise the agency to update their records. They should also send updates to any other credit reference agencies they use.

You can also contact your lender directly to query a mistake. If the lender agrees to the discrepancy, ask them to confirm this in writing on their letterhead and send a copy to the agency, asking them to update your file.

If you are unhappy with the response or would just like to explain a missed payment on your file you can send a Notice of Correction. This is a statement of up to 200 words that will be added to your file. Although lenders don't have to take this information into account, it at least gives you the chance to tell your side of the story.

Experian states that agencies will also help you escalate the dispute to a third party arbitrator if necessary, such as the Information Commissioner's Office.

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