UK credit unions report surge in loans after demise of payday lenders

Lending by UK credit unions has surged in recent years, following the collapse of major payday lenders and cost of living pressures fuelling a rise in demand for credit.

These unions emerged during the 1960s as not-for-profit cooperatives owned by and serving members with a common bond, like where they live or which industry they work in.

Credit union lending jumped 42 per cent between 2019 and 2023, according to analysis of Bank of England data by consultancy Broadstone.

They had £2.3bn in outstanding loans to their roughly 2.2m members at the end of 2023, compared to £1.6bn at the end of 2019. Last year alone saw lending growth of 21 per cent, the largest annual increase on record.

Broadstone noted that the total income of credit union members rose by more than a quarter to £324.3m in 2023.

Loans by credit unions are capped at an annual percentage rate of 42.6 per cent across most of the UK, making them a viable alternative to payday lenders and loan sharks for people on lower incomes.

The likes of Wonga, Amigo Loans and QuickQuid capitalised on a boom in demand for payday loans during the 2010s with short-term, high-interest deals.

However, a spike in customer complaints, regulatory action and compensation payouts has triggered the demise of all three firms in recent years.

Amigo said in December that it expected to finalise its liquidation in the coming months, having been in wind-down since the FCA suspended it from lending in 2020 for failing to perform adequate checks on consumers.

It has faced more than 200,000 compensation claims under a court-approved scheme.

“For members who may feel locked out of the mainstream lending sector, especially as demand for credit has risen following the pandemic and with tightening of lending criteria, these unions offer an attractive alternative,” said Tom Cuppello, director of risk at Broadstone.

The analysis found that the proportion of net liabilities in loans in arrears at credit unions rose “modestly” to 6.8 per cent from 5.2 per cent over the four years, despite the rising cost of living and a broader base of borrowers.