Unions vie with big lenders

Cheaper credit is coming to the workplace as staff associations offer cut-price loans to employees

LLOYDS Bank employees can get cheaper loans than customers - but they don't have to use the bank to get them. Lloyds Bank's staff association is launching a service that it claims will allow employees to borrow more cheaply than they could - or, indeed, customers can - from the bank itself.

The loans will be offered through a credit union recently set up by the Lloyds Group Union. Credit unions are financial co-operatives set up to provide cheap loans to members. Rates of interest charged are controlled by law, and can undercut even those of the big- name lenders. The maximum interest rate on unsecured loans is 1 per cent per month - APR 12.68 per cent.

As well as the Lloyds Group Union move, credit unions received two other boosts this month. They may soon be able to issue credit cards, after a provisional deal between the Association of British Credit Unions and the US banking group MBNA. This is already being actively considered by the British Airways staff credit union, one of the largest. And the parliamentary Deregulation Committee proposed increased flexibility in the setting up of unions and in the size of loans they may make to members.

Mike Blackburn, chief executive of the Halifax Building Society, which is being converted into a bank, recently urged people not to not to mourn the demutualisation of building societies, but to recognise instead that credit unions were the modern face of "relevant mutuality".

Members of the Lloyds' credit union should be able to start borrowing early in the new year. Staff join by making a deposit. Credit union loans are currently restricted to a maximum of pounds 5,000 plus the value of the deposit - which is also limited to pounds 5,000. Total loans are limited by the availability of savings. Meanwhile deposits also earn "interest" in the form of a dividend.

The Lloyds credit union offers a fixed dividend of 5 per cent a year. Treasurer Frank Preece said the rates would mean a better return on savings and lower interest on loans - especially small ones - than those offered by Lloyds Bank to staff, adding: "Confidentiality is a major factor. Our members do think management have an ability to pry into their spending habits."

Credit union administrative costs are kept low, either by the work being done on a voluntary basis or, with some larger businesses, at the employer's expense. At News International, publisher of the Sun, for example, a credit union has been running for more than six years, with the administration paid for by the company. It has 780 active members among 2,500 staff eligible to join. The union has an annual turnover of more than pounds 1m and this month is lending pounds 90,000 to its members, as well as releasing pounds 23,000 in share withdrawals.

At present credit unions may only be established by people who have a close association - "common bond" - with each other. Earlier this year, the Government proposed to ease these restrictions, although those proposals have been criticised by the Deregulation Committee for not going far enough.

The committee is suggesting that the savings limit be increased from pounds 5,000 to 1.5 per cent of a credit union's total shareholdings, where this is higher. Members would be permitted to borrow up to pounds 10,000 plus the value of their deposits.

A bandwagon seems to be rolling now in support of credit unions, not least because the low rate of inflation makes their savings rates that much more attractive. The Halifax's Mr Blackburn predicts that housing associations will increasingly promote credit unions to their tenants, although Enterprise 5 Housing Association, in Newcastle, is the only association that has so far established a scheme.

Credit unions' traditions are about providing finance for people on low incomes who might otherwise resort to loan sharks. But the benefits can be just as great for people on higher incomes who borrow limited amounts occasionally.

q Inquiries: the Association of British Credit Unions can be contacted on 0171-582 2626; the National Federation of Credit Unions is on 0191- 257 2219.