Affordable Credit
Credit is now a way of life, and there are many ways to borrow money.
People with a bank account can arrange an overdraft to help them finance a purchase (this typically has a fairly low rate of interest) or they may take out a loan from their bank.
People who don't have bank accounts are unable to do this. This means they often have to use higher interest borrowing. This can include using doorstep lenders or mail order catalogues.
Third sector lenders (Credit Unions and Community Development Finance Institutions) also offer affordable loans.
Credit Unions are financial co-operatives owned and controlled by their members. They have a common bond which determines who can join it. The common bond may be for people living or working in the same area, people working for the same employer or people who belong to the same association, such as a church or trade union. Credit unions traditionally required their members to save before they could take out a loan, with the size of the loan linked to the amount saved. Credit unions can charge a maximum interest rate of 2% a month. With support from the UK and Scottish Government, some credit unions now also offer instant loans without the requirement to save first, flexible Credit based on ability to repay and other products, such as budgeting accounts and insurance products.
Community Development Finance Institutions (CDFIs) are sustainable, independent organisations which provide financial services with two aims: to generate social and financial returns. They supply capital and business support to individuals and organisations whose purpose is to create wealth in disadvantaged communities or under served markets. There is only one CDFI in Scotland, Scotcash, based in Glasgow, which provides loans to individuals.
Credit providers are regulated under UK-wide consumer credit legislation.
The Consumer Credit Act 2006 provides a modern framework to protect consumers and create a fairer, more transparent and more competitive credit market. It enhances consumer rights and redress, by empowering consumers to challenge unfair lending, and through more effective options for resolving disputes. It improves the regulation of consumer credit businesses by streamlining the licensing system, requiring minimum standards of information provision to consumers and through targeted action to drive out rogues. It makes regulation more appropriate for different types of transaction by extending protections to all consumer credit and by creating a more proportionate regime for business.
If people cannot borrow from any of these regulated sources of credit, they may turn to illegal lenders (loan sharks). Illegal lenders provide small, short term, unsecured loans through networks of local collectors. Their interest rates are usually extortionate and borrowers find it impossible to pay off the loans, leading to a cycle of ever increasing debts. The UK Government has funded regional teams, including one which covers Scotland, from its base in Glasgow, to target illegal money lending operations.