Can credit unions offer payday loan alternatives that are affordable and viable?

Our long-awaited evaluation of London Mutual Credit Union’s payday loan scheme has been published today. The report demonstrates that not only does affordable short term borrowing through a credit union have the potential to be an effective way of diverting borrowers away from high cost lenders and give borrowers welcome flexibility about how to repay but also shows that even with the current interest rate restraints, such a product can be financially viable and sustainable in the long term.

Our research measured the success of the pilot project, examining actual performance over its 12 month lifetime, profiling of the new and existing borrowers together with their attitudes and behaviours towards payday loans and finally assesses subsequent patterns of financial service usage amongst new members to help determine the actual cost implications of delivering such a payday loan product. We hope that it provides the credit union sector with valuable insight and evidence that will encourage more affordable short-term lending products to be developed and launched.

Key headlines:

  • A total of 2,923 payday loans with a value of £687,757 were distributed over the course of the year-long pilot to 1,219 different borrowers.
  • Applicants liked the option of repaying payday loans over a longer repayment term. Just 29% of loan applicants wanted to borrow over the traditional one month term, with the majority (59%) opting to repay over three months.
  • Just over a quarter of all those borrowing during the pilot were new members, specifically attracted into the credit union by the payday loan product. A total of 331 new members joined in order to take out a payday loan – on average they borrowed fewer times (1.8 loans compared to 2.6) but loaned higher amounts (£249 compared to £226) compared to 888 existing members.
  • Delinquency levels appear to be relatively low with 6.3% of all LMCU payday loans being at least one month in arrears compared to 28% of all payday loans across the industry being rolled over, as identified by the Office of Fair Trading (OFT). Arrear levels amongst new members (12% of loans) are over twice the level of existing members (4.8%).
  • By borrowing through LMCU instead of high cost payday lenders, the 1,219 who borrowed during the pilot have collectively saved at minimum of £144,966 in interest charges alone, equivalent to almost £119 per borrower.
  • If the 7.4million and 8.2million payday loans taken out in 2011/12 from high cost lenders had been through a credit union alternative, we estimate that between £676 million and £749 million would have been collectively saved.
  • Before accessing their first LMCU loan, 74% of surveyed borrowers had taken an average of 3.2 over the 12 months before their first payday loan from LMCU. Worryingly, 17% of these had taken six or more loans.
  • Payday lending through a credit union is an effective way of diverting borrowers away from high cost lenders – over two-thirds of surveyed users would be unlikely to borrow from other payday companies again.
  • Crucially, new members do go on to utilise and benefit from accessing other financial services offered by the credit union:
    • LMCU membership actually encourages recent joiners to build financial resilience with almost £18,000 accumulated by the 331 new members during the pilot – a £53 average saving level per member.
    • Almost a quarter of all new members opened a current account with LMCU
    • New members were initially attracted by access to short-term borrowing but over 40% of all new members who have been with LMCU for at least six months then went on to take out a longer term loan, which increases to 52% with at least nine months of membership.
  • The ‘loss leader’ model adopted during the payday pilot is financially viable in the long-term taking into account the additional income from subsequent longer term borrowing by new members. Projecting the additional income generation levels amongst those new members who have been with LMCU for at least nine months across all new members, the payday loan pilot would actually realise an overall profit of at least £8,950 or £3.06 for every loan given, making the model financially sustainable.

The full report can be found here and the summary version here.

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