Do credit unions work?

Banks, some say, are like someone who lends you an umbrella when the weather is fine, only to demand it back at the first sign of rain. Bad news, then, for those whose finances seem to be under a perpetual cloud, such as the unemployed, those on low incomes or on state benefits.

Many have to turn to loan sharks and pawnbrokers, and the massive rates of interest they demand. But some are finding they have another option: credit unions. The idea behind them is simple. Members save regular small sums of money and are allowed to take out loans at rates of interest that amount to 1 per cent of the loan still outstanding. No security is required.

This means a credit union member pays APR of 12.68 per cent on a loan, compared with about 17.4 per cent on unsecured personal clearing bank loans. The Aston community bank planned in Birmingham expects its rates to be in line with those charged by Mercury Provident social bank, about APR 10 per cent. Building societies charge about APR 15.9 per cent.

Some credit unions, such as Dalmuir Credit Union in Scotland, enable members to consolidate their debts. They can borrow from the credit union to pay off credit card borrowings (APR 22.3 per cent), loans from pawnbrokers (APR 65 per cent) or borrowings from loan sharks, who have been known to demand 600 per cent. Then members can gradually pay back the cheaper credit union loan, saving hundreds or thousands of pounds.

The law demands that members of a credit union must have a common bond. They must live in the same area or work together. Taxi drivers, council employees and the police are among groups that have set up their own credit unions.

"We are not just a poor man's bank," says Rose Dorman, founder of the Dalmuir Credit Union, the biggest community-based group of its type in Britain. Mrs Dorman, a 64-year-old widow, set up the credit union 17 years ago. It now has 4,000 members in the town of Clydebank, near Glasgow, an area where the demise of traditional industries on the Clyde has resulted in high unemployment. Last year Mrs Dorman's credit union, from its office in an old school hut, took deposits of £1.5m from its members and gavethe lot back to them as low-cost loans.

Those who benefited include Isabel Somerville, a lone parent whose part-time cleaning job pays her £1.75 an hour. She borrowed, and repaid, a total of £1,500, which she spent on her children's Christmas presents and summer holiday. "It's brilliant. I have a friend who says she doesn't know what she would do without it, and she is right."

She is only one of 40,000 people who are now members of Britain's 150 credit unions. Many who would otherwise have no access to credit are able to borrow money for such things as weddings, furniture and holidays.

Jim Dearlove of the Birmingham Credit Union Development Agency says that instead of criticising the banks for refusing to extend their services to large sections of the community, it is better to devise ways of helping those who have no access to bankingfacilities. For instance, in Birmingham, bank cutbacks have led to a shortage of outlets where customers can pay their bills. So credit unions are setting up a pilot bill-paying scheme that will handle members' payments to the local utility companies. "There is no point in just slagging off the banks," Mr Dearlove says. "The message of the credit union is that you've got to learn to help yourself."