What is a credit union?
Credit unions are providers of savings and loans, based in the community. They started in the UK in 1964 and they offer an alternative to high street banks. They offer financial services to people who may find it difficult to obtain loans from a bank or building society, or to save enough to open a savings account at a bank. This means that they can be a lifeline for people on low incomes.
Traditionally, unions have been set up by members to benefit their community. The members will have something in common. This can be anything from living in the same town to belonging to the same trade union or housing association, or working in the same industry. The NHS credit union, police credit union and capital credit union are all examples of this. All credit unions are owned and managed by their members.
Credit unions are for everyone. They aim to encourage their members to save regularly. Unions provide members with low interest loans and they offer financial advice and assistance to their members. The goal is that union members save with them whenever they can, and if they need a loan only to borrow what they can afford to pay back. This helps everyone take control of planning their own finances. Members can become involved in the union through member meetings and each member has one vote to use in the decision-making process.
If you live with a family member who is already a union member, you will usually be able to join that union too. The unions can range in size up to thousands of members.
How do credit union loans work?
Some members use credit unions for savings, some members use them for loans and others will do both. The unions work by pooling together the money saved by members. Members who use the union for savings can start their savings from a very low amount per week or month, if they wish. Even a small amount saved each week or month will soon add up to a larger balance which members can draw on if they need to.
Members who have a savings account are paid a 'dividend' each year which varies according to how well the union has performed. This is instead of a fixed interest rate on savings. The pool of money from savings can then be used to provide loans to other members. These loans are provided at a low interest rate.
Credit unions are all run on a 'not for profit' basis for the benefit of their members. This helps to keep the fees and interest on loans low because there are no shareholders to be paid. The credit unions are run to provide the best service for their members, not to maximise profits.
More information on credit union loans
Credit union loans are offered to members who might struggle to obtain credit with other lenders. The loans offered are suited to your individual needs with rates set at an amount you can afford. The union will assess the individual financial circumstances of each member applying for a loan. Because unions are smaller, they can look at each application separately rather than applying rules rigidly. This can mean that you are more likely to be given a loan than if you apply with a direct UK lender, bank or building society.
The union will make sure that loans are only offered to members who can afford to pay them back. This is to protect all the members. The officer assessing members for loans will look at each individual application and can take into account a member's savings records. Some, but not all, require members to have built up some savings before they will give them a loan. If you do not have a bank account you may need to set one up.
How much can I borrow with credit union loans?
Most loans are for smaller amounts. It can be very difficult to get a bank or building society to lend these small amounts, between £500 and £3,000. The union may also offer the facility to pay for goods such as fridges and washing machines through one of their loans as a way to avoid expensive weekly payments on the high street.
Credit union interest rates for loans are limited to a maximum of three per cent per month. This means that the loans usually work out much cheaper than home credit doorstep lenders or payday loans. You can also pay the loan off early if you can afford it which helps you to save money and encourages you to reduce your debt faster.
The loans offered can range from shorter term loans of a few hundred pounds through to much larger loans over longer periods for holidays, buying a car, home improvements or even a mortgage. The length of the loan will usually be five years maximum on an unsecured loan or ten years where the loan is secured on your home or car.
With some credit unions, free life insurance is included with the loans. This means that if a member dies before repaying the whole of the money they have borrowed, the insurance pays off the balance.
What do I need for credit union loans?
The key things you need to apply for a credit union loan are:
- Union membership - you need to be a member of the credit union
- A savings account with the union - not mandatory at all unions
- Proof of ID - a passport of UK driving licence
- Proof of Income - eg. bank statements, an employment contract
- Personal Details
Before applying for a loan, you have to become a member of the relevant union. In many cases, this is very straightforward because you can join the union and apply for a loan at the same time.
Most credit union loans repayment terms will be for up to five years on an unsecured loan and up to ten years on a secured loan (where they will lend against something like your property or car). However, a few unions can lend for up to 25 years on a secured basis.
How much will it cost me?
The maximum charged on any credit union loans will be three per cent monthly on the balance as it reduces. This is the equivalent of 42.6% APR. This means that the most expensive credit union loans in Britain will be eight times less expensive in comparison to a payday loan charged at the maximum allowable rate. Because unions’ main focus is serving their members rather than purely profit, credit unions can offer smaller, shorter term loans that many high street and online lenders simply do not offer and for which other specialist lenders charge extremely high rates of interest.
You can check how much credit union loans will cost you by using the Association of British Credit Unions calculator here
Making payments directly from your wages or benefits can be a very good way of helping you to budget and making sure that you do not fall behind with repayments. Some unions offer Paypoint cards, meaning that you can visit a local shop offering the Paypoint service to make loan repayments.
Possible options may include loans secured against your home if you are a homeowner, overdrafts with your bank and loans backed by a guarantor. Sometimes a short term loan from an online lender may be suitable despite the high interest rate. Choose Wisely offer a unique Get Accepted service where you can compare the loans that your application will be accepted for and what you can expect to pay back on those loans.
Credit Union loans FAQs
The first step is to become a member. You will usually need to provide identity documents and fill in an application form. You can apply to some credit unions online, and you can visit the offices of others. You will then talk to a local loan officer who will find out more about your circumstances and the reasons why you are looking for a loan. The local loan officer will give you personalised advice.
Your application for a loan will include employment checks, income questions, and details of any amounts you already owe. For some bigger loans, for example, a mortgage or car loan, you will need proof of your ability to make the deposit payment. The loan officer will check your creditworthiness.
Your application can often be processed very quickly, sometimes even on the same day.
To find the right credit union loan, you first need to find the right credit union. You can search for a credit union here. You can also check with your trade union and employer, and your housing association if you are a housing association tenant.