Wednesday 16 October 2019

Credit union rates will be allowed to double for small loans

Looking for change: Finance Minister Paschal Donohoe. Photo: Gareth Chaney, Collins
Looking for change: Finance Minister Paschal Donohoe. Photo: Gareth Chaney, Collins
Kevin Doyle

Kevin Doyle

Credit unions are to be allowed to double their interest rates on small loans under new plans, the Irish Independent understands.

Finance Minister Paschal Donohoe is understood to be bringing a memorandum to Cabinet today which outlines a number of changes he wants to make.

A key measure is to relax the limits on interest rates. The proposal is aimed at helping credit unions compete with moneylenders. The move is likely to be met with some scepticism as it will encourage credit unions to engage in riskier lending practices.

However, those in favour of the change believe it will put credit unions in a stronger position to take on lenders who often charge vulnerable families' exorbitant rates.

Under existing rules, credit unions can only apply an interest rate of 1pc per month, but the minister is expected to double this to 2pc. No such restrictions are applied to the rates charged by banks or moneylenders.

The current cap on the interest credit unions can charge works out at 12.7pc on an annual basis. Mr Donohoe's office would not confirm the doubling of the figure last night.

There is no suggestion the new rate will be applied to existing loans. The higher rate will enable credit unions to lend more money because they can take on business that was previously too risky at the lower level of interest.

The rule changes were recommended in a report by the Credit Union Advisory Committee, which advises the Department of Finance on credit union matters.

The recommendations are based on the fact that credit unions are struggling to grow their loan books, and have to compete with moneylenders that are legally allowed to charge up to 287pc for loans.

Around half of credit unions offer the 'Personal Microcredit' scheme, which is designed to take on moneylenders and offer them much better value. Loans of between €100 and €2,000 are issued under the scheme.

But it is a loss maker for the sector, which is why so few credit unions have taken it up.

Representative body, the Irish League of Credit Unions, welcomed the recommendation to raise the interest rate cap from 1pc to 2pc a month, particularly in the context of the Personal Microcredit scheme loans.

Irish Independent

Also in Business