Credit Builder Loan
Some potential members may be unable to access mainstream finance because they have either a poor credit history or no credit history, giving them a credit score that would not be sufficient to meet the requirements of a low rate loan provider. As a result, they need to resort to borrowing from loan sharks or lenders who charge 4 figure interest rates. This in turn makes it expensive and difficult to afford and can lead to further delinquency and a worsening credit record and score. It creates a perpetuating cycle that is difficult or sometimes impossible to break.
We are looking for ways to help people to break that cycle and begin to improve their credit record and so increase their score.
The Aim
The aim is to provide a loan to the member that will:
- Improve their credit rating
- Provide evidence that the member can manage their finances
- Educate the member in saving and managing their finances
- Provide a platform for continued support from us as a lender
The Idea
The idea is to provide the member with access to a loan that will evidence their ability to meet their repayment commitments. That will then create a record of consistent and affordable repayments with the Credit Referencing Agencies. In time that should improve their credit rating and bring them back into the mainstream financial market.
It will also establish trust from us as a lender and provide a platform for continued support with further loans on a more commercial basis.
Sure, we hope that they would continue to borrow from the credit union, but for certain, it provides members with improved choice and viable options in their future financial planning.
The Basis of the Loan
- Applicant must become a member and meet the membership criteria
- A fully completed application form is required and a CRA search
- Affordability must be established and a mandated source of repayment
- A minimum of 50% of the loan must be put into savings and the member must agree to save at least £5.00 a week in addition to the loan repayment
- The savings are locked in behind the loan
- Only one loan per member
- Top ups to the loan will be considered subject to a further CRA search which should not show any deterioration in financial position and preferably improvement since the initial one
- If member pays off current credit builder loan satisfactorily within the specified terms, then the borrower may be eligible for a new Loyalty Loan if the CRA search reveals a much-improved position. EG the credit score starts at 119 and at the end of the loan is 169
- The loan rate will be 3% a month or as approved by the Board of Directors subsequently
- Borrower’s income must be sufficient to fulfil all outstanding debt and must meet RCU’s credit obligations guidelines. All loan requests by member are subject to Credit Union lending guidelines
- If the borrower’s circumstances change significantly (e.g. terminates employment or loses entitlement to benefits, the terms of the contract may remain the same or may be modified as needed while following lending guidelines.
Loan performance data will be shared with our current CRA partners. This will help establish and improve the individuals credit score.
Target
What is the target market for this type of loan?
These loans will be initially targeted at care leavers aged between 18 and 25 within the field of membership criteria
These Members will be given a chance on this product to improve their credit scores and will be members who we would not normally lend to because:
- Very low credit score – because they have never borrowed before or have defaulted on other loans in the last three years.
- They have a relatively low income but need to establish affordability
- What is acceptable on the CRA Search? Defaults, arrears, high level of lending? Frequent moving and no traceable history? Not on electoral register at that address?
- Support from a member of staff will be provided and a relationship established
- We will encourage members to alert us to any change in circumstances
- We will adjust payment schedules to reflect changes in circumstances
- We will encourage member to review their credit score to monitor the improvement on profile
- A limited amount of money will be made available for this product and will be at the Board of directors discretion