A trial scheme for a payday loan product offered by London Mutual Credit Union, funded by Friends Provident Foundation and the Barclays Community Finance Fund, and overseen by the Financial Inclusion Centre, saw almost 3,000 payday loans approved, lending £687,757 to 1,219 borrowers during the pilot period.
The product aims to address some of the concerns raised with payday loans already available on the market; for example, while 29% of applicants were happy with the usual one-month repayment terms, 59% opted instead for repayments over a three-month period.
Overall, 6.3% of borrowers went into arrears of at least one month, representing a delinquency rate of around a quarter the industry average, measured by the OFT as being about 28%.
With lower interest rates and favourable repayment terms, the Financial Inclusion Centre estimates that each borrower saved £119 in interest – equivalent to nearly £145,000 in total, which would scale up to £676-749 million across the industry as a whole, if all payday loans were offered on such terms.
Interestingly, the loan was developed on a ‘loss leader’ model, meaning borrowers must make further use of the credit union’s services in order for it to become profitable.
Among the costs involved in setting up the scheme, was a fully automated online applications and assessment system, which was considered necessary to compete with existing payday loan lenders and their convenient application processes.
But unlike most payday lenders, the LMCU product charged just 26.8% APR interest rates – and the report says “it was hoped that [borrowers] would go on to use and generate sufficient income to make the product financially sustainable” during the subsequent course of their use of the credit union.
The innovative experiment has already clearly helped several thousand businesses to access funds over the short term at lower cost, but also highlights the continued need for finances.
As always, we would recommend a focus on more consistent credit control, to ensure much-needed money is not locked up in unpaid and overdue invoices for any longer than is necessary.