Credit crunch high interest fears

Hayley Jarvis BBC Scotland's news website

As the economic downturn reduces access to affordable credit, volunteers at a credit union in North Ayrshire fear people in low-income households are being targeted by high-interest door-step lenders.

The credit union was set up following the collapse of Farepak iin 2006

It has been a busy few weeks for the First Alliance credit union in West Kilbride.

It was set up by volunteers to help those affected by the collapse of the Christmas savings club Farepak in 2006, but now it appears to be the credit crunch that is hitting people's pockets.

Louise McDaid, was instrumental in establishing the credit union which operates from a community hall in the town every Saturday morning.

"It's been quite an eye-opener setting up the credit union," she said. "We were very focused on the issue of Farepak at the time and you're looking for positive to come out of it. We then established a credit union and started to learn about people who can't get their hands on bank accounts, I just assumed everybody had access to bank accounts.

Like other financial organisations, Provident identifies where its existing customers live and then carries out marketing activity to generate new customers Provident Financial spokeswoman

"You then start to realise that people on benefits can't get access to affordable credit.

"We get people coming in who are in dire straits with their gas and electric bills and they can't afford to pay so we therefore offer special loans for that. But we also get small businessmen coming in who are just looking for access to maybe a few thousand pounds to help them out with a car or pieces of equipment to do their business."

The credit union is open to everybody, but it also lends to people who cannot normally get access to bank accounts, as do doorstep lenders, and Mrs McDaid is concerned that these kind of companies are targeting people on low incomes.

She said: "Some are horrifying stories when you've got individuals coming in who've taken out loans, with for example a Provident cheque, and they're having to pay back 183% interest on that loan. I find that absolutely appalling. How can that type of company be able to prey on people who can't get access to affordable credit."

Jean McLardy took out a loan for �400 at 183% interest

Jean McLardy, a volunteer at the West Kilbride collection point, took out a loan through Provident Financial for �400 - it cost her more than �300 in interest.

She said: "I was then being asked after I paid that off, why wasn't I taking out any more? And I said "Well, the interest rate." And still for about a year or more I was getting letters.

"I got one to see if I wanted a Provident credit card. There was a phone call to the house a couple of weeks ago for my mum, now she's 72, they're asking if she wants a loan. It's just too high a rate and I would never do it again."

Charging structure

A spokeswoman from Provident Financial defended the company's interest rates, explaining that its charging structure was different to that of other lenders so comparisons were misleading.

She said: "Provident home credit has a single, up-front, fixed charge that customers see from the start, which includes the cost of setting up the loan, the interest on the loan, the cost of the agent's weekly visit, and the fact that the total amount of repay will never go up - even if payments are missed."

But she conceded marketing was targeted at specific areas.

She said: "Like other financial organisations, Provident identifies where its existing customers live and then carries out marketing activity to generate new customers in those same area and in areas similar to them."

The Office of Fair Trading is currently conducting a review into irresponsible lending and a spokeswoman said doorstep credit may form part of that study.

In the meantime, the volunteers in West Kilbride hope more credit unions will be set up across the country to allow greater access to cheaper borrowing.

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