The Economic Secretary to the Treasury (Sajid Javid)
Last December the Government published a consultation on raising the maximum interest rate cap for credit union loans. This consultation sought views on the proposal to increase the maximum interest rate that credit unions can charge, from 2% per month to 3% per month.
Following this consultation, the Government today publish their response. The vast majority of the responses to the consultation were in favour, including individual credit unions, trade bodies, and consumer groups. The Government will therefore introduce legislation in the autumn to increase the interest rate that credit unions can charge from 2% to 3% per calendar month.
Allowing the maximum rate of interest to increase will enable credit unions to become more stable over the long term, and reduce the losses that they currently make on small, short-term loans. This means that low-income consumers will have greater access to reliable, affordable credit. Even with a 1% increase in the monthly rate of interest, credit union loans will still be substantially cheaper than the alternatives for many consumers with no mainstream options. It is important to note that this increase in the interest rate is 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.
Many credit unions are strongly embedded in their local communities and are committed to assisting those on low incomes. Research shows that credit unions often appeal to low-income consumers as bodies which are local, accessible and convenient, and which are community-based. Giving credit unions more flexibility in their lending will enable them to recruit new members, and further establish their role in helping the financially excluded.
I am placing copies of this document in the Libraries of both Houses.