Up to seven million people who currently pay a high price for borrowing could be helped by the growth of credit unions, a Government report has said.
These low income earners pay a "poverty premium" for credit from lenders including loan sharks and payday loan companies, as they often find themselves shut out of other more mainstream types of borrowing, the report published by the Department for Work and Pensions (DWP) found.
The feasibility study said credit unions could help to fill the "credit gap" if they undergo a major programme of change to expand and modernise. It suggested that it could be possible to deliver the growth needed within seven to 10 years.
More than 60% of some 4,500 people consulted said they would use credit union services if they were available to them.
Lord Freud, Minister for Welfare Reform, said: "Currently around seven million people fall into the trap of high cost credit, with some being charged more than 6,000% in interest on short-term loans. For too long predatory lenders have been plaguing the homes of vulnerable people, who often have no other way to get cash when they need it most."
The credit union sector in Britain is currently relatively small compared with other countries such as the United States and Canada, with just 3% of people using the unions here. But politicians have been encouraging credit union growth at a time when MPs are calling for tougher regulation for payday lenders and debt management companies.
Credit unions were given beefed-up powers by the Government in January, freeing them up to compete more effectively with banks.
The reforms enable the financial co-operatives controlled by their own members to pay interest on deposits for the first time instead of a dividend and to grow by accepting new types of membership.
Mike O'Connor, chief executive of Consumer Focus, said: "Government recognition that there is a significant need for more credit unions is very welcome.
"Access to affordable credit is a major issue for many consumers, especially where they need small sums to make an emergency purchase or to tide them over for a short time period. High street banks should do more to provide affordable credit for consumers, but are dragging their heels."
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