Money Insider: Credit unions are the solution for emergency loans

15  January 2013

Missing or being late with a couple of payments on a credit card may not seem much of a big deal to consumers at the time, but these financial indiscretions will damage their credit status and could lead to them paying through the nose for loans in the future.

Although the best buy tables are awash with personal loan rates below 10 per cent APR and countless credit cards advertising 0 per cent interest, people with a recent black mark or two on their credit record are unlikely to be able to take advantage of such competitive deals.

The real problem is that if your bank or building society declines your application for credit, you may end up paying an APR well into three figures to borrow from a non-mainstream lender.

The payday loans industry has grown rapidly during the economic recession, recognising that people are sometimes desperate for some financial breathing space and are seemingly prepared to pay well over the odds for credit.

Borrowing at sky-high rates on short-term loans of 30 days or less is becoming far more common, and now some lenders are targeting longer-term borrowing markets.

A quick look on the internet will reveal that loan brokers such as 12monthloans.co.uk are advertising unsecured loans for terms of 12 months at eye-wateringly high rates of up to 278 per cent APR.

If your own bank isn’t prepared to lend to you and you’re desperate to borrow money to help get the car through the MOT or get the central heating boiler fixed, then a one-year £500 “payday” loan could see you having to pay back £949 over 12 months.

The problem for borrowers with minor credit issues (we’re not talking about serial defaulters with a number of CCJs) is that they don’t realise there are other options available to them.

While consumers need to be aware of the importance of maintaining a good credit record, the Government should take a more active role to prevent greater numbers of consumers getting into serious debt problems through easy and expensive credit.

In March this year the Government announced it would make up to £73m available to expand and modernise credit unions over the next four years.

As part of this expansion programme it is considering making credit unions available to communities through the UK Post Office network. There are 465 credit unions in England, Scotland and Wales with more than 870,000 members. The value of loans made to members stands at £475m. However, more importantly, there is proof that they encourage people to save too, with more than £600m of credit balances held with British credit unions.

Mark Lyonette, the chief executive of the Association of British Credit Unions Limited, summed up the situation many people face: “Credit unions have shown they can provide the financial products and services that people on lower incomes need and want but often struggle to get elsewhere.”

With Citizens Advice reporting a fourfold rise in the number of people with payday loans coming to it for debt advice in the past two years, the promotion of the credit union alternative needs ramping up, and fast.

Interest rates up as euro crisis bites

The eurozone crisis is starting to affect the man in the street.

The knock-on effect means mortgages are getting dearer, while on the flip side, savers are seeing higher interest rates.

The latest issue of the online instant-access account from AA Savings (Internet Extra) sits proudly at the top of the best buys paying 3.2 per cent gross/AER.

There is the customary bonus element included in the rate (2.7 per cent fixed for 12 months in this case), but it’s not really asking too much for customers to make a note in their diary, iPhone or even on the kitchen calendar to switch their nest egg elsewhere when the bonus expires.

Banks are often criticised for their use of promotional bonuses, but a little organisation on your part means you can beat them at their own game.

The AA account is operated online and allows unlimited, penalty-free, instant access to your funds with interest paid annually.

Considering the best one-year, fixed-rate bond was only paying 3.25 per cent at the start of 2011, consumers have benefited from increased competition, and with banks looking to draw in more money via their branches, maybe we’ll see some even better deals for beleaguered savers in the next month or two.