A recent report by the London Mutual Credit Union has given a real boost to the prospect of ensuring payday lending is undercut, not just by sensible regulation, but also by healthy competition from ethical alternatives.
The following figures, from that report, are astonishing:
According to the OFT, the average loan amount is £265 and the average cost of a payday loan is £25 for every £100 borrowed. This typical loan repaid over one month would therefore cost at least £66, compared to just £5.30 with LMCU. By borrowing through LMCU instead of high cost payday lenders, the 1,219 who borrowed during the pilot have collectively saved at minimum of £144,966 in interest charges alone, equivalent to almost £119 per borrower.
That saving could be used by consumers to ensure they don't get caught in a future debt cycle - and what a huge saving it is, too.
The report does some further number crunching:
If the 7.4m and 8.2m payday loans taken out in 2011/2012 from high cost lenders had been through a credit union alternative, we estimate that between £676m and £749m would have been collectively saved. This would equate to an average saving of at least £91.43 for every payday loan made through the credit union.
Millions and millions of pounds could be saved from going into the pockets of payday lenders if an alternative, based upon the LMCU model, could be secured.
There is, however, a caveat. A new report by Damon Gibbons of the Centre for Responsible Credit (CfRC) has the following discussion:
the evaluation of the London Mutual Credit Union pilot reported that the payday loan offering was a "loss leader", finding that on average each loan would require a subsidy of £6.85 to break even.
However the government announced earlier in the year that by 2014 the amount of interest that a credit union can charge on a loan will rise from 26.8 per cent now to 42.6 per cent. This way credit unions will be able to offer payday alternative products that break even.
The likelihood is that because of the slightly higher interest rate the savings that borrowers will be able to achieve will reduce slightly, but CfRC has worked out that for credit unions there will still be a healthy return on investment. What's more, it will provide immense savings compared to payday loans for consumers.
As is well known the Archbishop of Canterbury said recently that given time credit unions would out-compete Wonga, after which news came in that Wonga earned in profit £1m per week in 2012. Understandably many were sceptical. But credit unions now have a fighting chance. This is great news for consumers.