The government is consulting on raising the cap on interest rates for credit union loans from 2 per cent per month to 3 per cent, after credit unions complained that the existing cap meant they did not break even on some loans.

It is not proposed that the cap would rise for existing loans, only for new ones, and only if credit unions want to apply the higher rate.

The credit union sector had complained to the government that the current interest rate cap, which prevents them charging any more than 2 per cent per month on loans made, means they often make a loss on smaller, short-term loans because the high administration costs exceed the interest collected.

Increasing the cap to 3 per cent would allow them to break even on those loans, increasing credit unions' stability and efficiency and freeing up more money to lend to members.

Almost a million people are members of the UK’s 400 credit unions, which take deposits from and lend to their members.

Sajid Javid, Economic Secretary to the Treasury, said the increased stability of credit unions provided by the extra income would inevitably increase access to low-cost credit for low-income borrowers, and stop them having to resort to payday lenders.

The deadline for responses is 15 March 2013.  The full consultation document can be found here.

The government is investing £38m over the next three years to help credit unions modernise and grow.