Coins on a 10 pound noteA pilot project by credit unions to offer "affordable payday loans" has been hailed a success, with borrowers feeling less under pressure to pay the money back quickly and more likely to keep up with repayments.

The project saw London Mutual Credit Union (LMCU) loaning out a total of £687,757 over the course of a year-long pilot to 1,219 different borrowers.


An online application and assessment system was developed to replicate the ease of taking out a high-cost payday loan for the project, which was backed by charity the Friends Provident Foundation and the Barclays Community Finance Fund.

Instead of being charged an APR (annual percentage rate) of thousands of per cent like some payday firms, borrowers were charged an APR rate of 26.8%.
The average size of the loan requested from the credit union was £238.

Two-thirds (66%) of borrowers said low costs, compared to payday firms, was the main reason for borrowing through LMCU.

Three-fifths (59%) chose to pay the money back over three months rather than the traditional one month period for taking out a payday loan.

The project found that almost two-thirds (62%) of "payday" borrowers with LMCU returned to take out another loan.

The main reason for taking out a loan in the first place was to cover household bills, with one in eight (12%) of people saying this.

Only one in 15 (6.3%) loans borrowed from LMCU fell at least one month in arrears.

Those behind the project contrasted these findings with figures from the Office of Fair Trading (OFT) showing that 28% of loans across the payday loans industry had to be rolled over.

Payday lenders are undergoing an in-depth investigation by the Competition Commission, after the OFT found "deep-rooted" problems in the sector, with people taking out loans which turned out to be unaffordable and being forced to roll them over, meaning the initial cost ballooned.

The typical cost for someone paying back a credit union loan over one month was £5.30.

A borrower taking out a loan with a payday firm pays monthly costs of around £66, according to the credit unions' findings.

Lucky Chandrasekera, chief executive of LMCU, said the body planned to roll the service out to more customers, following the "success of the pilot".

The Government is encouraging the growth of credit unions to help people who often find themselves shut out of mainstream borrowing.

Credit unions are mutual financial co-operatives that take deposits and give loans to members.

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

Credit unions in the US serve almost one-third of the country's population.

Of those who joined up to access a "payday" loan from LMCU, many went on to access other products offered by the credit union, with 331 new members placing a combined total of £18,000 in savings accounts.

Money placed with credit unions is protected by the Financial Services Compensation Scheme (FSCS), which also covers banks and building societies.

A recent Government report said that up to seven million low income earners who paid a ''poverty premium'' for credit from lenders including loan sharks and the payday lending industry could be helped by the growth of credit unions.

A contract worth around £38 million to help credit unions double the size of their sector was recently awarded to the Association of British Credit Unions (Abcul), which hopes to double the size of credit union membership to two million by 2019.

Mark Lyonette, chief executive of Abcul, said: "By making services as convenient and accessible as possible, credit unions can attract many more people away from high cost lenders."