This is a guest post by Julia Daniel, General Manager at North London Credit Union. Paying less interest is an important weapon in getting your debts under control and paid off, as the case study she discusses shows. You can find out what Credit Union you could join here.
A debt consolidation case study
When Marie (not her real name), a council nursery worker with three children, applied to North London Credit Union (NLCU) for a Christmas loan in 2011, what she got instead was what she described as “a life line”.
We could see from the information she gave us that she had a number of small debts, including a credit card, catalogues and an overdraft. She was paying them every month, but interest was building up and she was barely touching the capital (the original amount borrowed).
We lent her what she needed for Christmas, but offered to review her situation further in the New Year. We worked with her to consolidate the higher interest loans into one amount, paying them off at source, directly to the lender where possible (alternatively, credit unions may release money to the borrower in stages, asking for proof of account settlement before paying more funds). We agreed a monthly repayment amount, which reduced her monthly outgoings and – because it’s a predictable, fixed amount – made it easier for her to budget. She can clearly see when the loan will be paid off, the ‘light at the end of the tunnel’. If and when she can afford it, she can make additional payments at no charge.
Marie is now feeling more in control of her money and already saving again for next Christmas. She is keen to recommend credit unions to those in a similar situation saying:
“[North London Credit Union] provided a listening ear and a non-judgmental approach towards dealing with my finances.”
If you are considering debt consolidation, why choose a credit union?
Although credit unions can provide a good option for general saving and borrowing (and not just for those on lower incomes), many people join for help dealing with their existing debts. In north London we’ve seen an increase in demand for debt consolidation, and colleagues elsewhere in the UK tell us it’s the same there too. Whether you have outstanding payday loans, catalogue debt or items bought through pay-weekly retailers, it’s easy to get caught in an increasingly damaging debt trap and very difficult to get out.
Credit union interest rates are likely to be lower: the most you will pay on a credit union loan is 3% monthly (around 42.5% APR). Many credit unions, including NLCU, don’t charge more than 2% monthly (26.8% APR). Compare this to what you are paying on any outstanding payday loans, pay-weekly retailers, store cards and your credit card rate, and you could make substantial savings.
Do you need a good credit record?
Although most, if not all, credit unions now perform a check on your financial history, they try to be sympathetic to your circumstances, it is not a question of “computer says No’’. It might be that your credit record is nothing to write home about… When NLCU assesses an application we are checking there’s no evidence of avoiding financial responsibility (e.g. defaults with no attempt to settle) and that any loan will be affordable for you.
Too many credit checks aren’t good for your record, so we do a pre-assessment of your situation to avoid running the credit check where it is obvious that we will be unable to lend.
Talking about your options
If a credit union is unable to help you by consolidating your debts, they will almost certainly talk to you about your options either directly (some credit unions offer money mentoring, budgeting courses or similar) or they will signpost you to a partner agency that can help. They won’t judge and I can guarantee you that whatever your debt levels, they’ll have seen worse.
Likewise, if you have a mixture of creditors, they will only consolidate loans where there will be a benefit to you – credit union staff know that many people find it difficult to understand statements and rates and will explain it as clearly as possible.
Community organisations, staffed by local people
Credit unions are not-for-profit mutuals – put simply, that means that they use members’ savings, which are fully insured, to make loans to other members. At their heart, credit unions are community organisations, staffed by local people.
Counted as medium-sized in credit union terms, NLCU has 1,500 members and the equivalent of three paid members of staff, together with some amazing volunteers. We serve four London boroughs and south Hertfordshire.
Our savers and borrowers are our members and we are owned by them. Everything we do must be in their best interests – both for individual members lending decisions based on affordability – and at a community level – working to improve local areas through providing appropriate products, financial education and inclusivity.
Boosted by recent concerns about predatory lenders and by a government-backed expansion programme, the credit union movement in the UK is going from strength-to-strength, with ambitious growth plans, including the introduction of a new banking platform, which will enable those credit unions choosing to take part to offer full mobile and internet banking to members. In turn this will let credit unions move away from their traditional image of ‘lender of last resort’ and to attract a bigger spread of members, increasing sustainability, whilst continuing to offer services to those that can’t access mainstream banking.