Can higher credit union rates help beat the moneylenders?

When can charging higher rates save borrowers money? Well, Minister for Finance Paschal Donohoe will be hoping that his decision to allow credit unions charge more for their loans will achieve just this ambition. But is this really the right way to go about halting the rise of usurious moneylending?

To the casual observer, allowing credit unions charge more for their loans – up to 24 per cent APR in fact – might seem a perplexing move for a sector whose aim is to offer its members fair and reasonable rates.

Even more so given that by allowing credit unions to charge annual interest of as much as 24 per cent, Donohoe is pushing them into the much-maligned sphere of “moneylending”; under Irish consumer law a loan is considered a moneylending agreement when its total cost meets or exceeds an APR of 23 per cent.

This means that if a credit union does avail of the opportunity to lend at such a rate it will need to apply a “Warning: this is a high-cost loan” sticker to the loan documentation.

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But Donohoe is likely hoping that extra fees will be the carrot that finally pushes credit unions into the small loans borrowing space – and keeps thousands of borrowers out of the outrageously expensive grasp of traditional licensed moneylenders.

France, for example, imposes a maximum rate on of 21.2 per cent loans of up to €3,000

After all, despite launching a micro-lending product in 2015, credit unions have been slow to offer it. Before Christmas, this column queried why the “It Makes Sense” scheme, which was designed to combat the surge in moneylending by offering short-term loans of amounts between €100 and €2,000, has been used so little. Figures for last year, for example, show that in the 30-month period from November 2015-April 2018, just 7,500 of such loans were drawn down, with just 40 per cent of credit unions participating. At the same time, moneylenders were offering loans at a rate of about 30,000 a month.

Now, in a move that will be seen as being counter-intuitive by some, Donohoe is hoping that by increasing the potential gains for credit unions, they will be more inclined to lend to people who might otherwise have turned to moneylenders. And, even by charging more, credit unions will still be far cheaper than moneylending firms.

After all, a well known player in the space, Provident, charges interest at a representative APR of as much as 187.2 per cent depending on a customer’s financial position. This compares with a credit union loan at a rate of 12 per cent, or 24 per cent, if credit unions were to hike their rates by the full amount.

Credit ratings

So from this perspective, it's understandable why the decision has been welcomed by many. Indeed last year, the Social Finance Foundation, a wholesale lending agency that supports the development of community organisations and social enterprises, called for just such a move, arguing that it would allow credit unions deal with the "significantly greater costs" associated with lending small amounts to people, many of whom will have poor credit ratings.

But it's not the only way of going about it. If giving people, regardless of their income or credit rating, access to regulated credit is essential – and everyone from the Central Bank to the St Vincent de Paul would argue that it is – then the question is, does it need to need to be so expensive?

Let’s consider for a moment the international experience. While the UK now applies limits to moneylending, which mean that borrowers will never repay more than twice the amount that they borrow, other countries apply far more stringent approaches.

The experience in Germany shows that there could be scope for a specialist to operate in the space at a much lower cost

France, for example, imposes a maximum rate on of 21.2 per cent loans of up to €3,000 while the Netherlands sets a limit of 12 per cent above the average lending rate, and has even fined companies for lending at rates above this.

Or what about Germany? It has limited interest rates on moneylending loans to less than 14 per cent – and yet still has an active market. German provider Vexcash for example, promises cash from €100-€3,000 in just 60 minutes. But it's only allowed charge interest of 13.9 per cent – not too much above what credit unions can currently charge. This means that if you borrow €500 over three months you'll only pay €11.63 in interest; contrast that with Provident where you'll pay many multiples of this.

Little appetite

Back in Ireland, however, there appears to be little appetite for imposing a ceiling on interest rates. Indeed in its consultation on a new consumer code for moneylenders last year, the Central Bank argued that it in fact already has a cap on rates. Surprised? Well the regulator says that the fact that it doesn’t allow any increases to the maximum APR charged means that it has “effectively capped the cost of credit in this sector”. Perhaps, but it’s at a very high rate, something it doesn’t add.

It also argued that such a ceiling could be “ineffective and counterproductive” as it could see existing players depart and people turn to illegal moneylenders. But the experience in Germany shows that there could be scope for a specialist to operate in the space at a much lower cost.

So shouldn’t policymakers at least try this approach? After all, it seems curious that we can be so outraged about mortgage rates being somewhat out of kilter with European norms, while at the same time allowing lenders charge outrageous levels of interest, often to some of the most vulnerable members of society.