Deduction lending – does it add up for low income borrowers?

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By Mick McAteer and Gareth Evans, Financial Inclusion Centre

Millions of people are not served by the mainstream lending market and need alternative fair and affordable credit options. Recently, FairAll Finance published a report carried out by the Financial Inclusion Centre (FIC) and the Swoboda Research Centre on the benefits and risks associated with deduction lending products provided by credit unions. With deduction based loans, repayments are automatically deducted from wages (in the case of payroll savings loans) or from non means tested benefits (benefit loans). Importantly, the products have a savings element attached to the loan repayment.

The findings were very positive for both types of deduction loan – especially benefit loans. The majority of borrowers found the loans: easy to manage, reported the loan was affordable, helped them become more confident at managing their finances, and improved their financial wellbeing. Few benefit loan borrowers raised concerns about transferring benefits to their credit union. Similarly, few payroll savings loan borrowers were concerned about their employer knowing about their finances. People also reported that the savings element encouraged a savings habit and they intended to carry on saving once the loan had been repaid. People liked the automated element – both to help them repay the loan and save.

There are issues which need to be addressed. Around 10 percent of respondents reported difficulties in making loan repayments. A minority also said they didn’t understand they could stop payments if needed.

That’s why we developed the best practice recommendations. Good ideas can’t be left on the shelf – ideas must be turned into action. We want to expand access to affordable loans that work for people. But, that has to be done safely. As well as urging stakeholders to collaborate on promoting greater access to deduction loans, we suggested a set of best practice recommendations for credit unions to support development of these products. Credit unions should:

•  Conduct affordability assessments at the initial assessment stage and for repeat borrowing.

•  Put in place additional monitoring and communications to support borrowers who might be in financial difficulty.

•  Be proactive about embedding support packages (such as automated benefit entitlement checks, information about grants, and referrals to debt advice charities) into communications with accepted and declined borrowers.

•  Not be afraid to promote the positives of deduction lending, but don’t avoid telling borrowers about the commitments involved and how they can stop payments if they feel under pressure.

•  Make a point that anyone can be considered for a deduction loan, but be upfront that credit worthiness assessments and affordability checks will be done – this is a good thing for the borrower and the credit union. Our research suggest that acceptance rates for deduction loans were higher than for standard loans.

•  Be clear that payments can be stopped and show how, and in the case of payroll loans reassure that employers will not know about the borrower’s finances.


You might also like to check out the Greater Manchester Consortium of Community Credit Unions Soundpound article here

i3oz9sDeduction lending – does it add up for low income borrowers?