Credit unions are community-based financial institutions that are owned and controlled by their members. Traditionally, they were set up by groups with a common bond, e.g. workers, trade unions or people who all lived in the same area, but this changed in 2012 and now anyone can join a credit union if they meet the eligibility criteria.
There are over 500 credit unions in Britain, so you shouldn’t have too much trouble finding one. Visit the Association of British Credit Unions, the Irish Federation of Credit Unions or the Ulster Federation of Credit Union websites to find out more.
How Do Credit Unions Work?
Credit unions are different from banks and building societies in that they don’t have shareholders and must reinvest any profit not paid to savers back into the credit union to improve their services. Like banks and building societies, they are regulated by the Financial Conduct Authority as well as the Prudential Regulatory Authority and savings are protected up to £85,000 (above this amount means that individual’s savings are at risk if a credit union fails).
Credit unions have three main aims:
- To provide low-interest loans (but only where they are sure borrowers can pay loans back)
- To encourage members to save regularly
- To support members in need of financial assistance or advice.
Who Are Credit Unions For?
Beyond certain eligibility requirements based on where you work, live, or whether you are a member of a trade union, credit unions are for anyone who is interested in becoming a member. However, they may be especially useful to people on low incomes or benefits because credit unions are willing to offer small loans (as little as £50) which they can make available instantly for those in need. In this way, they are an excellent alternative to payday loans and are promoted by many charities and the Church of England as a responsible lender.
Borrowing From A Credit Union
You cannot borrow money from a credit union unless you are a member so if you are interested in taking out a loan with one, you will need to join first.
Because credit unions were originally formed with the idea that everyone saved so that members could borrow this money when they needed it, many credit unions ask members to save money with them before they will approve a loan. This isn’t always the case, but if you are opening a credit union account just to take out a low-interest loan, it’s worth checking that you are eligible to apply.
Loans are generally offered for up to five years if they are unsecured and ten years if they are secured. Some credit unions will issue secured loans for twenty-five years. Loans are generally smaller, up to approximately £3,000, though – nowadays – more and more credit unions are offering larger mortgage loans to allow people to buy their own home.
The interest rates credit unions can charge are capped at 3% per month (1% per month in Northern Ireland), though most charge 1% interest a month on average. This makes taking out smaller loans much cheaper than taking out the same loan from a short term payday or guarantor lender. There are no hidden charges, and borrowers who pay their loan back early aren’t penalised by having to pay early repayment fees.
Credit unions offer free life insurance when they approve a loan, meaning your loan is repaid if you die. Save money by taking up this insurance rather than any other payment protection insurance.
Credit unions offer people flexible ways to pay back their loans. This includes face-to-face in branch, by direct debit from your bank account, through your wages if your work is linked to your credit union, and through Paypoint cards, allowing you to make payments at local shops. Some credit unions will let you to pay your loan back weekly, though monthly repayments are standard.
If you receive benefits, some credit unions will take direct benefit payments, deduct your loan payment and then issue the remainder of your benefits to you.
The Downsides Of Credit Unions
While they are a good option for people looking for low-interest loans, there are compromises you might need to make when joining a credit union:
- Many do not offer online banking, so you may find it harder it to access your banking information
- There are fewer free ATMs available, though some credit unions will refund any fees you end up paying
- Their saving rates are no better than banks or building societies.