Many of us will borrow money at some point during our lives. But for some people, the options may be more limited – and more expensive – perhaps because they’ve struggled financially in the past.
Around three million people across the UK – many of whom may find it hard to get a loan from a mainstream lender such as a bank – use high-cost credit providers, such as doorstep loan firms or other “buy now, pay later” schemes.
But there may be more cost-effective ways of borrowing sprouting up – right within your own community.
Recent Bank of England figures show that the number of credit union members surpassed two million last year, with loans to members exceeding £1.5 billion for the first time. Credit unions, which are run to benefit communities, provide an alternative to other lenders, by offering their members affordable financial products.
There also seems to be an appetite among consumers for a wider choice of places to turn to. More than eight in 10 (82%) people agree that more needs to be done to ensure there are alternatives to high-cost lenders, according to recent research from the charity Nesta Challenges, which is working with the UK Treasury to help widen people’s affordable credit options.
The charity has launched the Affordable Credit Challenge – a competition to help grow real alternatives to high-cost lenders by helping community lenders, such as credit unions, partner with financial technology firms and develop new solutions to widen people’s access to affordable credit.
Not sure what that means exactly? Here, Chris Gorst, head of better markets at Nesta Challenges, explains more…
What is a community lender?
These are typically organisations with a social purpose that provide affordable loans, including to lower income customers. Credit unions and Community Development Finance Institutions (CDFIs) are the most well-known types of community lender.
What products do they offer?
Most credit unions offer savings schemes and short or long-term loans, but some also offer current accounts and mortgages.
Is there one in my community?
Probably. There are more than 400 community lenders of varying sizes up and down the UK.
Will I be eligible to borrow from a community lender?
To borrow from a credit union, you need to share a “common bond” with the community lender. This can be anything from living in a particular area, or being in a certain job or sector.
What are the interest rates on loans like?
The maximum interest rate credit unions are allowed to charge generally is capped at 3% a month, and in Northern Ireland the cap is 1% a month.
Why haven’t I heard much about them before?
Community lenders can lack access to big advertising budgets and the latest technology that some high-cost lenders have.
What solutions is the Affordable Credit Challenge looking for?
It is not looking for any “one-size-fits-all” solution. Prizes will support partnerships between financial technology firms and community lenders. Visit affordablecreditchallenge.com for more information and details on how to apply before the closing date of September 30.