Dating back to 1964 in Britain, credit unions are a unique approach to saving and borrowing that are becoming increasingly popular worldwide, with over 40,000 existing across 80 countries according to the Association of British Credit Unions.
Offering a viable alternative to those frustrated with the banks’ failure to manage their independent financial incentive, let’s take a closer look at how exactly credit unions work…
What is a credit union?
A credit union is a community savings and loan initiative that is run both for and by its members. Individuals pool together their savings to enable them to lend and borrow from one another, with the union operating through providing savings and loan accounts to its members. Credit unions have a number of defining features:
- Members share a common connection – This bond can vary vastly from union to union. Examples include working for the same employer or within the same profession, living in the same area or even belonging to the same church
- There is no limit on its size – Credit unions can be however big or small they need to be to operate, with membership numbers ranging from tens to thousands
- They are nonprofit – Unlike banks and large financial institutions, credit unions are nonprofit, meaning rather than paying turnover to shareholders, profit is invested back into both its members and services
They are financially regulated – Credit unions are still subject to regulation. This comes from both the Prudential Regulatory Authority and the Financial Conduct Authority, with the latter providing saving protection for funds of up to £85,000
What’re the advantages of credit unions?
A credit union works towards three fundamental goals:
- To provide more accessible loans through lower interest rates than those offered by mainstream lenders
- To actively encourage members to top-up their savings accounts regularly
- To help any member that requires any form of financial advice or assistance
It’s this concentrated, member-focused mentality that makes credit unions so appealing to many that feel short-changed by banks and other financial institutions. Loan eligibility, for example, is assessed by income and savings from member to member to ensure nobody is in over their heads – a distinctive form of financial guidance and care that you won’t necessarily get from large-scale financial corporations.
Moreover, there is also a cap placed on the amount of interest charged on a credit union loan – in England, Scotland and Wales, this is 3% a month, whereas in Northern Ireland this is capped at 1%. Subsequently, credit union loans are often significantly cheaper than those sourced elsewhere.
What are the disadvantages of credit unions?
Before committing to becoming a credit union member, it’s important that you also understand some of the drawbacks compared to saving and borrowing through more traditional means:
- Membership fees – Though typically small, it’s not uncommon for credit unions to charge a sign-up fee and implement a minimum deposit requirement
- Limited to specific areas – Though many credit unions belong to shared ATM networks, meaning you’re able to access savings from common ATM machines, the community focus of a significant number of unions can be quite inconvenient when compared to the nationwide, multi-branch accessibility of banks
- Fewer services – Credit unions won’t necessarily be able to provide larger, commercial loans such as mortgages
- Less user-friendly – With tech-savvy banks revolutionising banking through the ease of mobile and online application, it’s unlikely your credit union will be able to match the convenience and integration of mainstream banks
How do you take out a loan with a credit union?
Of course, first and foremost, you’ll need to join a credit union before being able to borrow. To do this, we recommend using this handy tool supplied by the Association of British Credit Unions that enables you to search for a credit union that best suits you. Once you’ve found the best fit for you, apply through the instructions provided – just be sure to have some identification to hand.
As with any other lender, when applying for a loan, you’ll negotiate and agree upon a repayment plan that you’ll be expected to stick to. The majority of credit unions will lend for up to 5 years on unsecured loans and 10 years on secured loans (check out our blog post if you’re not sure about the difference between the two!) at an average interest rate of 1% per month, however this will vary depending on the union.
How do you pay back a credit union loan?
Union members are able to pay back loans in a variety of ways, however whether these methods are an available option to you will, once more, depend on the union:
- Face-to-face repayments – Especially for smaller, residential-based community credit unions, borrowers are able to pay their loan back face-to-face with their provider
- Directly from wages – Primarily for employer-based unions, loans are able to be repaid by having a set sum extracted directly from your wages in a similar manner to student loan repayments
- Direct Debit – Some unions enable you to make repayments via Direct Debit schemes straight from your bank account
- Paypoint – Certain unions utilise Paypoint, a convenient repayment medium that can be undertaken at local shops and businesses
All information correct at the time of publication.
The Jolly Good Loans blog is full of helpful financial tips and advice, and remember, if you’re having financial difficulty, there is help available. Head over to the Citizens Advice website or call the free national debt helpline on 0808 808 4000.