Plans to boost the growth of credit unions as an "antidote" to payday lenders and predatory loan sharks will save consumers up to £1 billion in loan interest repayments over the next six years, the Government has said.
A contract worth around £38 million to help people who are currently caught in a trap of expensive borrowing by encouraging credit unions to expand and modernise has been awarded to the Association of British Credit Unions (Abcul).
As the successful bidder to deliver the Department for Work and Pensions' expansion project, Abcul aims to add up to one million more members to credit unions by 2019.
The Government wants to see people on low incomes, who often pay a "poverty premium" for loans because they have only limited options, becoming less reliant on expensive credit providers.
It has estimated that the project to beef up credit unions' presence will save borrowers up to £1 billion in loan interest repayments by March 2019, compared with the amounts they would have been charged if they had gone to a high-cost lender instead.
Around seven million people are caught in a high-cost credit "trap", with some being charged annual interest rates of several thousand per cent on loans.
A recent feasibility study showed that credit union modernisation could help up to one million people, giving them access to banking products, debt advice and affordable loans. The study said that in order for this to happen, credit unions need to work more closely together and increase their use of technology.
Minister for welfare reform David Freud said: "Credit unions offer an alternative to vulnerable people who have few safe options to get cash when they need it most. They are the antidote to predatory loan sharks or high-interest lenders."
Abcul chief executive Mark Lyonette said the body is "delighted" to have been selected to run the project, which will help credit unions to widen their ranges for products such as current accounts and cash Isas as well as working more closely together.
Credit unions are mutual financial co-operatives that take deposits and give loans to their members. The credit union sector is still relatively small compared with other countries such as the United States and Canada, with around 400 unions in the UK.