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Credit unions are to be given more freedom to compete with moneylenders, so what would this mean?

It could mean they can offer small loans to people who otherwise mightn’t get credit.

The government is to introduce legislation after a series of recommendations.
The government is to introduce legislation after a series of recommendations.
Image: Shutterstock

CREDIT UNIONS MAY be allowed double the amount they charge in interest, allowing them to increase what they lend to compete with moneylenders.

The move comes as Finance Minister Paschal Donohoe accepts a recommendation made by the Credit Union Advisory Committee (CUAC), which also argued that lending limits for credit unions should have been reviewed in 2016.

At present, credit unions are not permitted to grant loans at more than 1% per month, which translates to an annual rate of 12.7% APR.

In the final report of the CUAC group, it recommends that this ceiling should be raised to 2% per month, or 25.4% APR.

The Irish League of Credit Unions (ILCU) has said that it is in favour of the change as it will allow its members to “compete more effectively with moneylenders”.

The ICLU says the move allows for the expansion of the Personal Microcredit Scheme, which is available to people getting a social welfare payment who may have difficulty getting credit from other sources.

The scheme, which is marketed as the It Makes Sense Loan, allows applicants seek small loans of between €100 to €2,000.

These loans can be granted with 24 hours and the convenience at which people can apply is designed to give people alternatives to moneylenders.

The scheme is also designed to give members a credit history that may ultimately allow them access normal financial services or products.

Figures from 2017 show that there are 39 moneylenders in the country and that they most-frequently provide loans over a 9 month term with an APR of 125%.

The maximum APR allowable is 188.45%, excluding collection charges, and up to287.72% APR when collection charges are included.

A study from that same year by academics at UCC explains that most moneylenders take the form of ‘doorstep lending’:

The majority of firms (31) fall into the category of home collection credit firms (commonly referred to as doorstep lending) which offer cash loans provided in the home and repaid through a weekly home collection service.

Other moneylending firms are collect payments remotely, such as direct debit, and others are involved in the provision of goods on credit.

That same study demonstrated what recipients could save if they were to avail of an It Makes Sense loan rather than a moneylender loan at almost the top rate.

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PastedImage-33217 Source: sff.ie

In its response to the recommendations,ILCU chief executive Ed Farrell said increasing the interest ceiling will allow credit unions serve their communities better.

“The raising of the interest rate will offer headroom to credit unions to expand the Personal Microcredit Scheme, and meet the administrative overheads associated with it,”Farrell said.

“This scheme is designed to provide access to credit to the most vulnerable in our society, and to offer a viable alternative to moneylenders.”

In effect, it is hoped that credit unions will be able to use the change to give more people access to the scheme by allowing credit unions to lend more.

The Minister for Finance said yesterday that he would take time to look at the other recommendations in the CUAC report but that he will make moves now on the interest rate change.

“I have asked my officials to begin preparations to make the legislative amendments required to raise the Credit Union interest rate cap from 1% per month to 2% per month,” Donohoe said yesterday. 

About the author:

Rónán Duffy

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