Credit unions explained
What is a credit union? And how do they work? Find out more about what they have to offer and how they could help you.
Today is International Credit Union Day, so it's as good a time as any to take a look at exactly what credit unions do and whether they can help you with your money.
In recent years, the number of credit unions in the UK has risen considerably, partly in response to the tough economic times we’re living in.
In a nutshell, a credit union is a not-for-profit financial co-operative run by volunteers that borrows and lends money to its members. Some have been set up to help a particular area or community; others are open to groups of people with the same occupation (for example a police force) or interests. This is referred to as a ‘common bond’.
To qualify for membership, you have to share that common bond with the other members.
The Government is investing £38 million in credit unions over the next couple of years in a bid to modernise the sector.
Borrowing from a credit union
If you need some extra cash and you're having trouble getting hold of a credit card or loan from a high street bank or building society, you should definitely take a look at what your local credit union has to offer.
You should be aware up front that you will have needed to have saved some money with the credit union, generally over a few months, before you can apply for a loan. So this isn’t a quick fix if you need some cash in a hurry.
How much you can borrow will usually depend on how much you’ve saved over that time. It’s usually three or four times the amount you’ve saved.
If you’re a homeowner you could take out a secured loan, but this puts your home at risk if you fall behind with your repayments. A credit union loan is not secured against your home.
By law, a credit union can’t charge you more than an annual interest rate of 26.8%. They also don’t charge any penalties for early repayment.
Most credit unions will be upfront about the cost of the loan and won’t even talk about it in terms of interest rates.
Saving with a credit union
Credit unions can’t exist without cash coming in. If you just want to save some money that will then be made available to other members via loans, you can.
Until last year, credit unions couldn’t pay interest on savings. Instead, they paid a dividend once a year, typically around 2-3%, although some credit unions pay more. That has now changed.
If you’re looking for a good return on your savings alone, credit unions are not the best bet. But if you want to put a small amount of money away, perhaps for Christmas, and help people in your local community then you should definitely consider them.
Some credit unions now also offer Cash ISAs.
All savings with credit unions are covered by the Financial Services Compensation Scheme up to a limit of £85,000, although most credit unions will have a maximum savings limit well below that amount.
Many credit unions allow you to pay into your account via a deduction from your salary. You might also be able to pay money in at local shops, libraries and council offices.
Some credit unions have expanded into offering current accounts, prepaid cards, insurance and even mortgages.
Finding a credit union near you
The Association of British Credit Unions runs the findyourcreditunion.co.uk website, which will help you find a credit union near you.
This is a classic lovemoney article that has been updated