Loans from community lenders increased by a third last year: What are they and could you use one?

Loans offered by non-profit “community” lenders rose by a third last year, new data shows, as households struggled to make ends meet amid the ongoing cost-of-living crisis.

Community development financial institutions such as community banks and credit unions will have lent £46 million to 90,630 people by 2022 according to Responsible Finance’s impact report.

CDFIs are social enterprise lenders who state that their social purpose – reaching customers who cannot borrow from big banks – is their primary motivation, rather than profit distribution.

They normally offer lower rates than the payday lenders from whom these customers would otherwise borrow – yet they had to reject 93 percent of loan applications last year because they weren’t sure the borrowers could afford the repayments.

Without access to community lenders, customers may have to turn to loan sharks and other exploitative lenders to get credit, as they cannot access major banks.

This puts them at risk of paying much higher interest payments on their loan than elsewhere. Community lenders offer lower interest rates to make borrowing affordable.

For example, a £900 loan from social enterprise Salad Money over 12 months would cost £104.03 per month, including £358.60 total interest.

The alternative for someone with a bad credit score can be a £900 loan from the lender LoanPig, ​​a £900 loan, which costs £150 per month over the same period. This would mean a total interest payment of £900, 150 per cent more than Salad.

Last year, customers borrowed an average of £500 from public lenders and saved an average of £308 in interest on each loan by going to a responsible lender.

In addition, unlike the major lenders, community lenders are less likely to pass on the rising cost of capital resulting from successive increases in base rates to their customers.

Salad Money has not passed on the Bank of England’s base rate hikes to its customers, and CEO Tim Rooney says its social investors (who borrow the money to lend to customers) have not increased the rates they charge Salad.

Customers are increasingly turning to community lenders or CDFIs for loans to pay for essentials, Responsible Finance research shows

Many still cannot afford to borrow

The share of community finance loans taken out for essential bills and expenses rose 10 percent, according to Responsible Finance data, and the number of people borrowing to pay for an appliance or piece of furniture rose 27 percent and 22 percent, respectively.

Responsible Finance says the numbers suggest people’s savings and financial resilience are exhausted.

In addition, even with cheaper rates, community lenders could only lend to 7 percent of the loan applicants they received in 2022, because for many people their circumstances meant they still couldn’t afford to borrow.

This is supported by research from HSBC which found that almost half of Britons (49 per cent) have cut back on non-essential spending and four in ten (38 per cent) say they are sticking to tighter budgets in response to the increased cost of to live.

In addition, more than two in five (45 percent) of Britons want to reduce their grocery bill by shopping at a cheaper supermarket, while food prices are at their highest in 45 years.

HSBC offers free financial “health checks” and webinars to both clients and non-clients, including the option to book a call with a financial wellness consultant for additional personalized support.

Theodora Hadjimichael, chief executive of Responsible Finance, said: ‘A quarter of UK adults have less than £100 in savings and one in six people have no money set aside.

“Low-income households often don’t have access to an overdraft or credit card, and the lack of savings leaves them highly vulnerable to a financial shock.

“A small loan that they can pay back in a few months may be the only way to buy something big, like a refrigerator, or pay for one-time expenses, like a car repair.”

In addition to offering loans, community lenders also help customers identify sources of income, such as government benefits, that they may not know they are entitled to. Last year they identified an average of £410 per person per month for 68,470 people on unclaimed benefits, adding £4,920 to their budget for the year.

Help for small businesses

In addition to individual loans, community finance companies also offer small business loans.

Last year they lent £29 million to 2,480 start-ups, with an average loan of £11,704. They also lent £52 million to 754 established SMEs with an average loan of £69,325, according to Responsible Finance.

Half of the businesses helped were located in the 35 per cent most deprived areas of the UK. The need for access to corporate finance in the UK is critical.

Almost all companies that had borrowed money last year (99 percent) had previously been rejected by another lender.

Hadjimichael added: “Inflation, higher costs of doing business and uncertainty have affected many companies, making it more difficult to obtain loans.

“There was only a 64 percent success rate for SMEs applying for financing from mainstream lenders; a sharp year-on-year decline of 80 percent.

‘Lending 20 CDFIs to small businesses in the regions of the UK. CDFIs are a proven way to get financing for SMEs where it will have the greatest impact.”

As a result of funding from CDFIs, 3,760 jobs were secured last year and another 4,420 were created, the report said.