# UK Credit Unions charge up to 42% APR on small loans



## Brendan Burgess (11 Jun 2014)

There was a very interesting interview on BBC Radio 4's Moneybox on a UK Credit Union.

I was surprised at the following: Page 12 on 


> Reporter: So what rates are they offering? Chris Hunt is from Kent Savers Credit Union
> Hunt: Our cheapest loan is 5.9% and that's certainly comparable with the high street.  In terms of our very small loans, you'd be paying no more than 42%.
> Reporter : That certainly is cheaper than payday lenders who typically charge over 1,000% APR. The smallest loan Kent Savers offer is £300 . I'm told they'd make a loss on processing anything less.



On their website, they say that the representative APR is 26.8% 

I find it interesting just how expensive it must be for lenders to hand out small loans.


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## Gerry Canning (12 Jun 2014)

It is interesting how expensive it is to give out small loans.The 42% is eyecatching.

Lts factor in static costs for lenders.

Used to be reckoned that every loan cost e200 to get it on the system.
This can only be recouped by increasing APR or doing what Banks/HP companies do and that is have documentation fees onto agreements.Most lenders will not lend below 5,000 as they cannot cover their admin costs and make a profit. 

So on 5,000 over 36 months.
Bank /Hp can charge 5.9% + Fees  means payment shows on docs  @ 151.88 but real monthly when charges added (say 150) = 156.45.(people have got used to accepting these charges)

Credit union charge 5.9% = 151.88 and no charges.

So if credit Union charges @ 156.40 Apr appears as 7.9%

It means that on 5,000 , Credit Union loan @ 7.9 is the same cost as HP Loan @ 5.9 + charges of 150.

If it costs Lender 2% for them to borrow 5000 for 36 months, and if they lend 5,000 at 5.9% they have gross income of only 476 . That 476 has to cover their running costs arrears etc . 
I just do not see profit in it .
It means that if 1 in 20 loans are not repaid ,lenders, need circa 10 good loans just to make up that shortfall. 

Back to Kent Credit Union.

Example 

1,000 @ 26.8% over 36 months on 42% = 40.72 per mth.
1,000 ' 2%  (cost to UNion)                       = 28.64
................................................................................
Monthly gross profit to union                        = 12.08.

Means that on 1,000 loan @ 26.8% Union  makes 12.08@36 = 434.88 gross profit..

So whilst 26.8 %  APR appears high , when you break it down it is ok.

As Brendan says , {interesting}.


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## WizardDr (13 Jun 2014)

For starters there is a statutory cap of c. 12.68% APR under Section 38.

In addition there is a collapse in investment income and the new rules on what qualifies for investment purposes is excessively prudent.

Further the regulatory burden is now such that you would need to be a Director of Goldman Sachs to be able to comply with all the burdens.

Whilst 1000% APR is mouth wateringly attractive,  the research concludes that Payday lenders in the UK facilitate availability which seems key. 

As the Central Bank pour more concrete into the Credit Union systems, getting lloans from Credit Unions is getting harder.


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