Chris Dawkins, a 43-year-old from Bridgend, South Wales, faced mounting debts in the years that followed the breakdown of his marriage.
The father-of-two, who works in customer service, had a patchy credit history, making it difficult for him to access a standard personal loan that could have helped him to get on top of his finances.
So he turned to a doorstep lender when he needed some extra cash. A doorstep loan, also known as home credit, is a type of short-term loan with very high-interest rates, similar to a payday loan.
Despite doorstep lenders being regulated by the Financial Conduct Authority (FCA) and required to follow certain rules, Chris wasn’t happy with how he was sold his loan.
“The agents were working on commission and they were just concerned about getting you that loan,” he explains. “They really didn’t care about whether or not you could afford it, so it felt like they weren’t really being sold fairly.”
With debt piling up, Chris needed to improve his financial position, so he turned to his local credit union, Bridgend Lifesavers.
More than just a savings club
Chris had heard about credit unions before he joined, but he’d never looked into them or considered if one could help him.
“I just saw it as a savings club but then I found out you could borrow from it if you needed, and that felt like a good option,” he says.
And Chris isn’t the only person in the dark about how a credit union could help.
Research last year from the government-backed Money and Pensions Service found 19% of 25- to 34-year-olds would consider a payday lender or other high-cost credit option if they needed to borrow, compared to just 5% who would consider a community lender such as a credit union.
Credit unions are not-for-profit co-operatives, where members pool their savings to help each other. There are hundreds of credit unions across the UK, offering members savings accounts and loans, each one owned and run by its members. Some credit unions, generally the larger ones, offer other products, such as current accounts and mortgages. To find out more, you can search for your nearest credit union using Find Your Credit Union.
However, it’s worth noting that there are restrictions to joining a credit union and they won’t suit everyone. You will usually need to have a common bond, such as living or working in the area, working in the same profession or for the same employer, or belonging to a particular church or trade union. For example, to join Bridgend Lifesavers, you need to live, work or volunteer in Bridgend County Borough or work for the Swansea Bay University Health Board in South Wales.
Working towards financial stability
Soon after joining the credit union, Chris had some problems with his car, which he needed to ferry the children around and travel to his company’s head office.
He applied to borrow money from the credit union and received two loans, each of £250, which helped pay for repairs.
In England, Scotland and Wales, the interest rate that credit unions can charge on their loans is capped at 3% a month or 42.6% APR (annual percentage rate). In Northern Ireland, the cap is 1% a month or 12.68% APR. Significantly cheaper than many doorstep lenders, who can charge 200% APR or more for loans which often need to be paid back weekly over six to nine months.
To put it in cash terms, debt help charity StepChange says it means you can “probably expect to pay back £150 to £180 for every £100 you borrow,” with a doorstep lender.
While credit union loan interest rates can be higher than many standard personal loans and credit cards, if you’ve struggled with debt in the past you may find it difficult to qualify for these cheaper deals.
“I’m really glad I don’t have to use the doorstep lender anymore,” says Chris, who is now repaying £44 a month towards his credit union loan. He is also putting £10 a month into a savings account, which is a common feature of credit union loans.
Credit unions often encourage you to build up your savings alongside your loan repayments, intending to help you form good savings habits so you have money set aside for any future emergency expenses. The downside is that making lower monthly repayments will mean it takes longer to pay off your loan, costing you more in interest.
By repaying the loan, Chris is also building up his credit history and improving his credit score. This is helping him to get into a more stable financial position and offers the potential to access more affordable forms of credit if he needs to borrow in the future.
More ways to tackle debt
Turning to a credit union isn’t the only way to tackle debt. If you are struggling with your existing payments, whether that’s rent, mortgage, utility bills, or loan repayments, for example, speaking to your provider is a sensible first step. You may be able to agree on a more affordable payment plan or another solution that makes your situation more manageable.
Depending on your circumstances, you may be able to find more affordable credit from another lender or even borrow from friends or family.
If you’re not sure of the best way forward, consider speaking to a debt adviser to get personalised guidance. This is especially important if you’re thinking of borrowing money to consolidate existing debts.
Contacting a debt charity, such as StepChange or National Debtline, could help you by offering free and impartial advice on your situation.
Grace Brownfield, senior influencing manager at Money Advice Trust, the charity that runs National Debtline and Business Debtline, says: “If you are worried about your finances, contact a free debt advice service like National Debtline as soon as possible. Even if you have not yet fallen behind on repayments, it is never too early or too late to seek advice.
“Our advisers are there to help, and can talk through your situation with you and work out the next steps to take based on your circumstances. They can help with things like contacting your creditors, working out your priority debts, and, if needed, find a debt solution that is right for you.”
Debt advisers can recommend different courses of action, depending on your situation. For example, they may suggest a debt management plan or a breathing space, which gives you up to 60 days’ protection from most creditor action while you start to address your debts. Many free resources and advice services are available, so you shouldn’t ever have to pay for debt advice. You can find a list of free, independent and impartial debt advice services at gov.uk/debt-advice.
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