A payday loan charging just 2% a month may seem like a dream but that is exactly what one credit union is doing as it tries to save Londoners from the clutches of rip-off lenders.
The payday loan market is worth over £2 billion but has been criticised for its high rates – with a typical lender charging 5600% – and irresponsible lending to those who cannot afford it which kickstarts a spiral of indebtedness.
However, London Mutual Credit Union (LMCU), which provides loans, savings and current accounts to those in the boroughs of Southwark, Camden, Westminster and Lambeth, is trying to stop those desperate for money from turning to well-known names such as Wonga.
It is offering a payday loan with an annual interest rate of 26.8%, far lower than offered anywhere else in the market. A £400 loan will cost £8 a month with LMCU compared to a staggering £127 with the average payday lender.
Joan Driscoll, senior manager at LMCU, said that while the union did not encourage people to take out payday loans it provided a cheaper alternative for those in need through its CUOK brand.
Borrowers can apply for a CUOK loan online but if they do not qualify, the union will call them to discuss their circumstances and "talk through what they can afford", said Driscoll.
Once a person takes out a payday loan the union can then help them to organise their finances, which may mean taking out a longer term loan, rather than relying on the hand-to-mouth nature of payday lending.
The loans offered by the credit union have no arrangement fees or early payment charges.
For a £1,000 loan borrowed over 12 months, LMCU charges 13.68% and total interest charged is £71.18. This compares to 22.3% charged by a typical credit card provider – a total of £124.28 in interest – and 177% interest charged by door-to-door lender which will cost £650 in interest over the year.
"People take out a payday loan and then we try and get them away from crisis loans and move them onto longer term loans which are cheaper," she said. "When people take out a longer term loan we encourage them to put away £20 a month or even just £5 or £10 a month because we are a savings and loan co-operative you have to have savings in order for us to make the loan."
Driscoll added that the savings its members accumulate can be used to pay off or reduce a loan early at no extra cost.
While LMCU is the first credit union to offer payday loans it has passed on its systems to other unions for free in the hope that others around the country can start to offer payday loans. You can only become a member of a credit union if you live or work in the area it operates in.
Mick McAteer, founder of the Financial Inclusion Research Centre and member of the Financial Conduct Authority board, said he was 'a big fan' of CUOK.
"If people stay in the credit unions they move into proper loans and then people start saving,' he said. 'We are trying to test [the new payday loans] on a bigger scale as it is a great route to financial security...and the credit union could rescue you from [high-charging] payday lenders and loan sharks."