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Rise in Credit Union interest rate opposed

Proposals to hike up interest rates on Credit Union loans would contravene the very "ethos" of the community lending society, it's been claimed.

Discussions on whether to increase the monthly interest rate from 2% to 3% per month are set to take place at the Northern Ireland Assembly amid similar plans announced yesterday by the Government at Westminster.

Northern Ireland branches of the Credit Union, which apply a lower monthly rate of just 1%, are against the move.

The new rate would be designed to make it easier for the lender to offer small, short-term loans but to make it more profitable.

The plan, being offered to low-income borrowers as an alternative to expensive payday lenders, would enable them to "break even" according to the Treasury.

Current rules mean that credit unions often end up making a loss on shorter-term loans of under £1,000 due to the administrative costs involved.

The Government found that the typical cost to a credit union of setting up a £500 loan over 12 months is £108 but the maximum income it can make from this is just £68.

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Tommy Jeffers of the Ulster Federation of Credit Unions said the issue was set to be discussed at the Assembly in 2013.

"To raise it would be to introduce an APR of 36% and we are not in agreement with this at all," he said.

"It gets away from the ethos of credit unions. The rate here is 1% and it will remain at that though they might introduce the option to let people increase the rate but it defeats the ethos."

Credit unions are mutual financial co-operatives that take deposits and give loans to their members. There are around 400 unions in the UK, with almost one million members.

A Department for Work and Pensions (DWP) report published in May said that up to seven million low income earners who pay a poverty premium for credit from lenders including loan sharks and the payday lending industry could be helped by the growth of credit unions.

The credit union sector in Britain is still relatively small compared with other countries such as the United States and Canada.

A consultation on the proposals will run until March 15, 2013 and the change is expected to come into effect from April 2014.