High demand for Child Benefit loans, say credit unions

Christine Moore and Christine McKeague from the Manchester Credit Union

There's been a rapid rise in demand for a type of loan to families who repay using their Child Benefit, Radio 4's Money Box has learned.

Several credit unions say they are seeing much greater demand for what they call "family loans", where a parent or guardian can borrow up to £500 as long as they arrange for their Child Benefit to then be paid into an account with the credit union.

Part of the weekly Child Benefit is then taken to repay the debt and part is placed into savings.

The idea is that by the time the loan has been repaid the customer will also have a savings cushion in place to fall back on.

Why have the loans been so popular?

Manchester Credit Union has seen such high demand for its family loan product that the Association of British Credit Unions Ltd (Abcul) say more of their members are now considering introducing the loans.

"It started slowly but then someone put a comment about it on Facebook and we just got inundated," says Christine Moore, chief executive of the Manchester Credit Union.

"We actually ran out of funds for lending and had to borrow from other credit unions."

They launched their Child Benefit-linked loan in 2017 and currently 9,000 members are using one.

To date they have lent £9m this way. These are typically loans of just a few hundred pounds, so that amount represents a large number of customers.

"We are finding that people generally are struggling to manage whether it's due to Universal Credit or other benefit cuts or zero hour contracts. Lots of our members are in part-time work and would typically turn to a doorstep lender to help them budget," says Christine Moore.

Several other credit unions offering this kind of borrowing report high demand, as it's a way for people with a low credit rating to borrow the money they need to budget.

Enterprise Credit Union in Merseyside says that 70% of their borrowers repay using their Child Benefit, while 1st Alliance Ayrshire have seen a 52% rise in this method of repayment since 2016.

What do the borrowers say about the loan?

Ashleigh is a mother of two living in Hull and she regularly uses a Child Benefit loan through her local credit union.

"The first time I used it was for Christmas and I've also used it to replace an appliance if it's broken down and I haven't had the extra cash.

"The Child Benefit goes into the credit union account and then however much you've agreed for the repayment to be goes out weekly to repay that loan. And then what's left goes into your credit union account.

"I don't go in every week to get the money out and so it just accumulates and I use it to put towards their birthdays and Christmas.

"I think it's a really good way to borrow and save, especially for people with more than one child. It's hard to save up for Christmas and as they get older their presents get more expensive.

"Before I did try a door-to-door loan but the interest that you're paying back is sky high with them. I don't renew my loan as often as I could but if things break down I always know I've got that money to fall back on."

How much interest do the credit unions charge?

The interest charged on Child Benefit loans is not low - most credit unions charge the maximum APR they are allowed, which is 42.6%.

However, Christine Moore says that fairly reflects the cost of administering the loan and that it's a far lower cost than the other forms of credit available to financially vulnerable families.

For example, a customer who borrowed £500 borrowed from Manchester Credit Union over 50 weeks and repaid at £12 a week would pay £91.95 in total interest or £1.84 a week.

That compares to a doorstep lender charging a typical 272.2% interest, where the same customer could end up repaying £410 in interest alone.

Matt Bland, head of policy at Abcul, says the loans are typically small and repaid quickly, meaning just a small amount of interest is paid. "More credit unions are actively offering this because it's an innovation that's working for people and works with the benefits they receive," he adds.

"It helps low-income families smooth the lumpy costs of things like Christmas and back to school."

Christine Moore is aware that people might criticise families for not using Child Benefit to meet every-day weekly costs but she says: "These are being used as budgeting tools. Families are using them to meet the costs of their families - but those costs are not always steady, they come in bumps."