UK: Struggling families face astronomical interest on loans

The queues forming outside credit unions to arrange loans show the extra stress that Christmas is bringing to already hard-pressed workers and their families in the UK.

Credit unions are co-operatives controlled by their members and have to have a “common bond”. These used to be for workers from one factory, business or social club, but that remit has now widened. They have seen their customer base increase by over 20 percent in the last year. Members do not get a loan straight away but have to save for a period with the union and then, if agreed, they can have a loan at a low interest rate.

The sole benefit of using the co-operative credit unions for many is that they will not face the astronomical interest repayments that some loan firms charge. “Pay Day” loans are the most notorious with interest rates of 5,000 percent if the whole amount is not repaid in one month. The firms involved excuse their rates by claiming that they represent a penalty because the loan was only meant to be short-term, hence its name.

However, when faced with repayment difficulties many borrowers are offered “rollovers”, to extend their loan for months at a time, incurring huge costs. One £80 loan escalated into £600 over a couple of months. Research by Consumer Focus last year showed the number of payday loan users rose from 300,000 in 2006 to 1.2 million in 2009. That figure has now doubled to 4 million, according to some recent estimates, as the Conservative-Liberal Democrat government’s austerity measures bite, with rising unemployment, inflation and pay cuts and freezes.

Any search engine throws up dozens of different payday companies offering decisions in 15 minutes. People are assured that the money will appear in their bank accounts straight away, and that no credit checks will be made.

The companies go under the salubrious names of QuickQuid, Check’n Go, Wonga, etc. The Consumer’s Association estimates that the payday loan industry is worth £1.5 billion. Lenders advertise the ease of repayments that will be deducted from customers’ bank accounts on payment day, potentially leaving them unable to meet other, more important, costs such as their mortgage. Over 18,000 homes were repossessed in the first six months of the year, while the number of mortgages in arrears stands at 78,000—all potential repossessions that could surface next year.