Sunday Express pages 20,21 - 20 May 2001

Avoid the small-print
penalty of loan firms

There is a way to borrow and save at the same time and it could be just around the corner from your home.
Caroline Sefton reports on credit unions

Cheap debt. It's what all the banks and loan companies promise, only to hit you with the small print later. And the more desperate you are for money, the more you will pay for the privilege of borrowing.

Borrowing from giant door-to-door lenders such as Provident Financial and Shopacheck - as about 2million people in the UK do - can cost up to 170 per cent in interest and charges a year. But there is a way to borrow small sums cheaply. Credit unions lend money at low interest and with low charges - loans often include free loan repayment insurance, for example. By law, you should pay at most 12.7 per cent interest a year, or 1 per cent monthly, on a credit union loan.

That means borrowing l,000 from a credit union for a year costs just 65. Borrowing the same amount from a High Street lender could cost as much as 185, or 37 per cent. With a moneylender, you could pay more than 60 to borrow just 100 for a year.

If you're seen as a good risk, you can get good deals on the High Street. There, lenders compete so fiercely that some are lending even more cheaply- than credit unions. Nationwide and Bank of Scotland would charge just 52 in interest to borrow l,000 for a year.

But the High Street deals only work for people with a steady income. What's more, borrowing small sums increases the cost of borrowing, instead of cutting it.

Provident Financial, with 1.5 million customers, is the UK's biggest home credit operator. One of its most popular loans is for 100, repayable over 54 weeks at 3 per week or 162 over a year.

Provident's spokesman says that its charges include interest, administration and the cost of sending an agent to collect repayments. The loan costs also build in flexibility - borrowers can opt to pay less some weeks, then catch up later.

The beauty of collecting repayments face-to-face is that Provident Financial, and its competitors, are much more likely to get their money back than a bank making loans from a call centre 500 miles away from its borrowers. Steve Wilcox, manager of the Sheffield Debt Support Unit, explains why: "There'll be the embarrassment factor. They don't want to let the agent down. And people often see companies like the Provident as a kind of life line."

But one money adviser in the Northeast, who asked not to be named, says he knows of many peop1e with debt problems who are paying the Provident rather than paying their rent, let alone other bills such as their council tax.

One Sunderland man, earning 640 a month, pays Provident Financial 72 a week to cover a portfolio of 100 loans. A 100 loan costs 136.50 repaid over 21 weeks. He has three children, aged 10, 12 and 14, and is already in arrears on his council tax.

As a result, the council has obtained a repayment order to automatically deduct 140 a month from his wages to pay the arrears. After paying the Provident, his council tax arrears and buying food, he cannot pay the rent.

Credit unions are a way for people to switch their debts to a better value loan, and without any pressure to take out fresh loans.

In Shropshire, Phillip Jones (not his real name) ended up in debt with Provident Financial and its rival Shopacheck after ill health forced him to give up work in the late Nineties. The 45-year old father of six needed the loans to buy clothes for the children and pay for home repairs.

An initial loan of 100 led quickly to fresh loans and built up to a debt of 500. "Once you got to the end of a loan, they were straight in offering another one," says Phillip. "Being out of work, they have got you, and can charge much higher interest than people with good credit records usually pay." Phillip already had a savings habit, with cash set aside to meet regular bills. But there was not enough money coming into the house to meet one-off emergencies.

"Then one day the credit union was doing a recruiting session in the street. I saved a small amount every week and cleared off all the outstanding Provident and Shopacheck loans. "It got me out of trouble and has done the same for members of my family and friends," says Phillip.

Richard Collier, the development manager at Leeds City Credit Union, says "The larger moneylenders do not care whether you have got any savings or not.

"People are not members but customers. They do not own the business they are borrowing from and they are constantly being allowed to build up debt, upon debt, upon debt."

Shares in Providential Financial - and the other large, listed moneylenders - have been a good investment over the last decade, thanks to their large market and strong grip on customers. The Church of England is a surprising beneficiary of the Provident's success. Its investment arm, the Church Commissioners, owns 1.6million shares in the moneylender, worth nearly 13million.

But campaign group Church Action on Poverty (CAP) is pressing the church to ditch the shares. It's investment advisers have yet to make a decision and critics, who had expected the news months ago, accuse them of dragging their heels.