Credit unions to get more funding

Credit unions will receive up to £38 million to modernise and expand so they can support one million more people, the Government has announced.

Welfare Reform Minister Lord Freud said the additional funds will help credit unions to buy new computer systems and infrastructure so they can increase the numbers of people they help to save and borrow. The Government will also consult on allowing credit unions to increase the 2% monthly cap they face on interest rates to 3%.

The move followed a report by the Unite union that workers are increasingly turning to payday loans firms because their wages run out before the end of the month, creating a "debt disease" which is spreading rapidly across the country.

Research for Unite among 24,000 workers revealed the "shocking" finding that one in eight regularly turned to loan companies such as Wonga, Quick Quid and Money Shop to tide them over in the week before getting their wages.

Lord Freud said: "Credit unions provide an essential service for communities and we want to help them to extend the support they provide. Credit unions are growing - almost doubling in membership since 2006 - but we want them to be a mainstream option for savers and borrowers just as they are in other countries and to ditch the image of a 'poor man's bank'.

"Our investment will help credit unions reach up to one million new customers providing a real alternative to rip-off interest rates from payday loans, doorstep lenders and illegal loan sharks."

An independent study found that even the biggest credit unions struggled to meet the operating costs of making small loans to people on lower incomes.

Unite said workers faced "horrific" levels of interest of up to 4,200% as they take out loans averaging £200 a month, adding that at such high levels of interest, it would take people three working days a month to pay back a loan of £200.

Neera Sharma, assistant director of policy and research at Barnardo's, said: "It is essential that the most vulnerable families have access to feasible alternatives to exploitative high-cost credit, including fit-for-purpose bank accounts and good financial advice.

"Investing in credit unions must be at the heart of a package of Government measures that ensure the poorest families are not left crippled by debt. The Government must continue to consider how credit union services can be made more accessible through Post Office branches in the UK."