Credit Unions to lead fight against Payday Loan firms
The introduction of an innovative type of loan insurance could bolster credit unions across the UK and detract a higher quantity of people from utilising short term finance in the form of Payday loans.
Cuna Mutual, a major global credit union insurer, have begun a collective initiative with Britainís unions to implement a ëdebt waverí clause into borrowers loan contracts which will enable them to obtain payment holidays if they suddenly become unemployed or their health declines during their loan term.
It is hoped that the new measures will improve the popularity of credit unions, as they will offer a cheaper and more stable form of short term finance than Payday loan firms.
Payday loans are short term, high interest forms of finance that typically work on a one month repayment basis. The interest rates attached to the loans are usually sky high with many customers acquiring funding at the cost of 2000% APR.
Conversely, credit unions are often more flexible with their customers repayment, and typically offer loans with interest rates between 30% and 75% on a non-profit basis.
Cuna's chief executive, Paul Walsh, has argued that the new measures will go a long way to expanding the popularity of credit unions and enhancing their reputation.
"I think it's a very credible way of transforming the attractiveness of their products. It makes them more innovative and more relevant to certain types of customers," Walsh said.
Credit Unions have long been popular in the US, with the idea of a community financially upholding its members particularly ingrained within the mentalities of the community.
In the UK however, the reputation of the unionís remains relatively low, despite the fact that they offer a cheaper and superior short term finance product than almost all Payday loan companies.
However, authorities in Britain have now decided to utilise the unions in their fight against Payday firms, with the Archbishop of Canterbury recently announcing his intention to use his powers to create a vast array of Credit Unions to achieve this goal.
The Archbishop has proceeded to obtain the services of one of Britainís best financial regulators in order to assist his new credit union initiative and fight against payday firms.
Recent figures from the Association of British Credit Unions have disclosed that almost 1 million people currently utilise them across the UK, with over £0.5 billion distributed to borrowers up until the final quarter of 2012. However,
Payday loan lending was far higher up until this point with a monumental 2 billion distributed as short term finance in 2012 alone.
As well as enhancing Credit Unionís fight against Payday loan firms, it is also hoped that the new insurance will fill the gap in the market by Payment Protection insurance, which formerly fulfilled the role of covering customers in the event that sickness or unemployment fell upon them during their loan term.
PPI was distributed by a number of banks in the first years of the millennium, but fell apart in 2010 when it was found that many customers were actually unable to qualify for it, leading to banks paying out over 20 billion in compensation over the past few years.
The knock on effect has been that borrowers have been unable to acquire the compensation they require with their loans in the event of a sudden case of misfortune, meaning that over 95% of people have acquired huge forms of finance such as mortgages without any insurance attached to it.
The new insurance will hopefully fill the gap left by PPI, though it will only apply to credit unions and other forms of community finance, and more will need to be done in order to ensure a safer and more secure financial market.
Since 2010 banks and other mainstream lenders have stopped offering PPI or any alternative protection, fearful of further mis-selling scandals, leaving millions of borrowers with no security should they fall upon hard times.
So far, Plane Saver is the only credit union that has implemented the new insurance policy, though statistics have indicated that credit union borrowing has increased by 23% since its introduction last year.
A formal deal has also been agreed with Clockwise; whilst Cuna have identified that they are currently in ongoing advanced discussions with a number of building societies and lenders across the UK.
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