Young borrowers likely to use payday loans and aren’t aware of ‘more affordable’ credit unions

Young people are twice as likely to turn to high interest pay-day lenders than not-for-profit community lenders, research from the Government-backed Money and Pensions Service has found.

Friends and family were the number one source of loans for the group aged 25-34 , with 26 per cent saying they would turn to ‘close contacts’. 

Meanwhile, 19 per cent said they would look at payday lenders or other high cost short-term credit if needed.

Just 5 per cent of those asked said they would look at borrowing from non-profit lenders such as credit unions.

Furthermore, not-for-profit finance organisation Fair4All estimates there are 7.7 million people aged 18 to 34 in financially vulnerable circumstances, accounting for nearly half of the estimated 17.6 million adults living in these conditions.

Lauren Peel from Fair4All Finance told This Money: ‘We are seeing people who are already feeling that they have cut back and are still in their overdraft every month.

‘But they have got goals and are ambitious around where they want to live and the careers they want to have.

‘Many of them are renters and that isn’t always a stable market. People worry year to year about what their rent increase is going to be.’

What are credit unions and community lenders?

Credit Unions are financial co-operatives that provide savings, loans and a range of other services to their members. In order to join, credit unions usually require members to be part of a common bond, such as living within a designated area or working for a particular employer. 

However, you may not always have to be a current member of a union in order to use its services. 

These organisations are often able to lend money to customers on more favourable terms than other high street lenders, and have schemes in place to assist more vulnerable borrowers who may struggle to access credit elsewhere.

Victoria Barry, 36, got trapped by pay-day lenders in her early 20s but with the help of a credit union was able to repay her debts and is now a homeowner. 

Victoria Barry got caught in a vicious cycle of using high-cost payday loans in her early twenties.

Talking to This is Money, Victoria, now 36, from Manchester says she initially borrowed just £20 from a payday lender after a friend recommended them to fund a night out at the end of the month. However, caught by the high interest charges, Victoria then kept supplementing her salary with loans at the end of the month.

It reached the point where she was paying back almost the entirety of her salary to payday lenders on a monthly basis, and then having to get another loan to live on. The crunch point came, she says, when her borrowings outstripped her earnings.

‘The next payment was going to be money I didn’t have going into my account,’ she recalls. ‘I was only on a £10,500 salary and the month before I had borrowed £700. With the £150 interest I had no way to give them that money.’

At the time Victoria was working for Co-op Insurance and noticed adverts for the Co-op Credit Union, which is open to members of a range of co-operative organisations, on her workplace intranet.

‘It was quite shameful, my family aren’t in and out of debt so I had felt I had let people down and didn’t want to turn to them. I saw it [credit union adverts] on the intranet and thought I will give this a go.’

She says she was worried that the staff at the union would tell her off for mismanaging her money, but when she met an adviser face to face they were reassuring and helpful.

They provided her not only with an affordable repayment plan but also the financial health tools, such as budgeting skills, to be able to manage her money.

‘No one tells you how you budget and it’s really simple, this is where money is coming in and this is what you can spend’, says Victoria who now owns her own home in Mossley, Greater Manchester.

‘It was a case of someone listening to you and not judging you which was the most important thing for me at the time.

‘Looking back at that period of time it was like there was no hope, so I am happy to share my story because if one person like me hears that there is someone out there who can help you who isn’t a loan shark or pay day lender then it’s worth it.’

What else can you do if you need credit? 

The first thing Peel suggests is checking whether you are entitled to any benefits you aren’t already claiming. 

There are online tools to work out if you can access other source of income. It is estimated that around £15 billion of benefits go unclaimed annually.

When there is a need for credit don’t be ashamed, she says. Just make sure you are doing the research and approaching finance providers who can help find a lower-cost option for you. 

The high-cost pay day lenders are often at the top of search engine results so take the time to look a little further to work out what’s available and affordable.

Victoria Barry echoes the message that you shouldn’t be ashamed if you are in financial difficult and reach out for help. 

She suggests speaking to a credit union but even if they can’t help you they will be able to point you in the right direction for alternative sources of help.

‘Asking for help is the first step,’ she says. 

One in six adults (16 per cent) say they are too embarrassed to seek help when they are in financial difficulty, according to research from Bluestone Mortgages.

 However, a greater barrier to getting advice is that nearly a third (31 per cent) don’t think they are eligible for help, while over a fifth (22 per cent) say they don’t know where to begin to look for support. 

To raise awareness, credit unions and other community lenders are encouraging young people in their 20s and 30s to look at their credit choices and consider what options are available to them through a range of local and national community lenders that may suit their financial circumstances.

They can be found at Find Your Credit Union – credit unions near you and Finding Finance – Responsible finance providers offering simple, smaller affordable loans.