We welcome news that a recommendation of the Credit Union Advisory Committee (CUAC), that the ceiling of 1% per month which credit unions can charge on their loans be increased to 2%, has been accepted by Finance Minister Paschal Donohoe.
The move will enable credit unions to effectively extend the Personal Microcredit Scheme which currently advances loans of up to €2,000 to those in receipt of social welfare. These loans are called ‘It Makes Sense Loans’ and they are generally approved within 24 hours.
The increased interest rate will enable credit unions to advance these loans whilst taking account of the inherently riskier nature of the loans. The members who avail of these loans, albeit at higher than normal credit union interest rates, are benefiting from an interest rate that is significantly lower than that which they are paying to other lenders. In addition the member will build up a credit history which should enable them to apply for loans using the normal credit union channels in future.
We recommend that credit unions that are going to introduce the higher interest rates and enter into the microcredit market ensure they have the right policies and underwriting procedures in place before making any decision on how they will proceed. Consideration should also be given to whether the credit union needs to outsource some of the processes such as legal and credit control where it feels that it may not have the necessary expertise in-house.
We believe that with careful planning, there are opportunities for credit unions in this sector. There is undoubtedly a demand in the market for this type of loan.