Credit union maximum interest rate cap

The Treasury received 43 responses to this consultation, and the majority of responses were in support of raising the interest rate. Therefore, the government intends to introduce legislation in the autumn to raise the interest rate to 3 per cent.

The new 3 per cent interest rate will be introduced alongside the Credit Union Expansion Project, which is run by the Department for Work and Pensions (DWP), and will enable credit unions to reduce their running costs and become financially sustainable. DWP aims for the sector to serve one million more people by 2019.

Under the current cap credit unions often make a loss on the small, short term loans. These losses are part of the reason that eight credit unions go under each year. This change is designed to mitigate losses, making the sector more stable, and remove reliance on government support.

The extra income will allow credit unions to:

• use the extra income to consider lending to members with a higher risk profile, which they currently turn away
• reduce their losses
• reduce cross subsidisation with larger loans and
• offer a wider variety of products

The rise in the interest rate cap is not compulsory and credit unions will be able to choose whether or not to increase their rates. The new, higher cap will come into effect on 1 April 2014.

Raising the maximum interest rate cap for credit union loans. This consultation seeks views on the proposal to increase the maximum interest rate that credit unions can charge, from 2 per cent per month to 3 per cent per month.

The rationale for this proposal was explained in detail in a Feasibility Study (published in May 2012) which found that credit unions are currently unable to break even on small, short-term loans. This leads to a lack of stability in the sector, which is damaging for the long-term future of credit unions.

Allowing the maximum rate of interest to increase will enable credit unions to become more stable over the long term. This means that low income consumers will have greater access to reliable, affordable credit, without having to resort to more expensive means, such as home credit or payday lenders, or worse, illegal lenders.

It is important to note that this increase in the interest rate would be permissive; it does not require credit unions to increase the interest rate they charge but simply permits them to do so if they judge that the benefits outweigh the costs. As such, the measure eases an existing regulatory burden on credit unions.