Credit Unions, so much better than banks
It’s Friday, the car has broken down, the washing machine has flooded the kitchen and your electricity bill has to be paid next week. You need a quick loan to tide you over so where do you go? Your bank is a definite no no as you are maxed on your overdraft. Even worse would be a doorstep lender, PayDay loan or a Loan Shark.
When you’re desperate you often do things you later regret: you forget to take in the interest rate being charged and how long the repayment period is and your main goal is to get some cash to get you through your emergency.
But have you ever thought of going to a Credit Union? I can’t find fault with them and this is why:
Credit Unions are financial co-operatives owned and controlled by their members. They offer savings and great value loans plus they are local, ethical and know what their members want.
Membership numbers for Credit Unions have doubled since 2002 with them now boasting 524,000 members and they have savings of £460 million.
How do credit unions work?
Unlike high street banks, Credit Unions don’t go to the money markets to raise money for loans. Instead they attract savers by paying them a return, not interest, but a dividend on their savings. These savings provide a pool of funds from which loans are made and which is ‘rented’ to other members, who in turn pay interest on their borrowing.
The interest received from loans is used to cover operating expenses and any surplus is put into reserves and goes towards paying a dividend to the savers.
All profits from a credit union go towards developing the business or are returned to members; the only shareholders in a credit union are the members.
Who runs the credit union?
A credit union is managed and controlled by a volunteer Board of Directors who are all members, with each member having only one vote irrespective of the amount of savings they may have.
How do you join one?
Every Credit Union has to have what is known as a "common bond” which determines who can join.
An example of a common bond would be people living or working in the same area, people working for the same employer such as the police service or people who belong to the same association, such as a trade union or even church. If a credit union fails to limit membership in this way they risk losing their status as a Credit Union.
The services offered are mainly savings and loans but some unions will also offer a bank account, a ‘Credit Union current account’, which will come with direct debits and cash withdrawal facilities through ATM machines. Some also offer ISAs.
Is borrowing from a Credit Union expensive?
Interest rates for loan repayments can vary between 1 – 2% per month (12.7 - 26.8% APR).This means that if you borrowed £1,000 at 1% per month over a year then you would pay back £1,067, i.e. £67 interest, just over £5 per month. You may find some unions vary the interest but it must not be more than 2% per month. Some will have their own loan calculator on their website which details exactly how much your payments are for your selected repayment period. So it’s very flexible.
Credit Unions do not have penalties if you pay the loan off early and all loans will come with built in life insurance at no extra cost to the borrower, so if you were to die before the loan was repaid then the life insurance would clear the debt.
A further upside of Credit Unions is that they often lend smaller amounts of money over flexible periods of time than your high street bank, for instance small loans of £50 to £3,000.
How much can I save with a Credit Union and will it be protected?
You can be flexible with the amount you wish to save on a weekly or monthly basis or whenever you have the spare cash.
All Credit Unions are regulated in the same way as UK banks and building societies, by the Financial Services Authority (FSA).
A Credit Union is also required by law to maintain an insurance policy to protect the Credit Union against fraud or theft.
How to find a Credit Union
It is relatively simple to do - go to Find Me A Credit Union
I did a quick search and found 42 in my ‘chapter’ alone, with memberships ranging from as low as 21, up to 6,473.
If you don’t have easy access to the internet call The Association of British Credit Unions Limited on 0161 832 3694 who will help you search for your nearest Credit Union.
Generally thought of as being interchangeable with life assurance, but isn’t. Life insurance insures you for a specific period of time, at a premium fixed by your age, health and the amount the life is insured for. If you die while the policy is in force, the insurance company pays the claim. However, if you survive to the end of the term or cease paying the premiums, the policy is finished and has no remaining value whatsoever as it only has any value if you have a claim. For this reason, life insurance is much cheaper than life assurance (also called whole of life).
An overdraft is an agreement with your bank that authorises you to withdraw more funds from your account than you have deposited in it. Many banks charge for this privilege either as a fixed fee or charge interest on the money overdrawn at a special high rate. Some banks charge a fee and interest. And other banks offer a free overdraft but impose very high charges for exceeding the agreed limit of your overdraft.
The Financial Services Authority is an independent non-governmental body, given a wide range of rule-making, investigatory and enforcement powers in order to meet its four statutory objectives: market confidence (maintaining confidence in the UK financial system), financial stability, consumer protection and the reduction of financial crime. The FSA receives no government funding and is funded entirely by the firms it regulates, but is accountable to the Treasury and, ultimately, parliament.
If you own shares in a company, you’re entitled to a slice of the profits and these are paid as dividends on top of any capital growth in the shares’ value. The amount of the dividend is down to the board of directors (who can decide not to pay a dividend and reinvest any profits in the company) and they will be paid twice yearly (announced at the AGM and six months later as an interim). Dividends are always declared as a sum of money rather than a percentage of the share’s price. Although dividends automatically receive a 10% tax credit from HM Revenue & Customs (HMRC), which takes the company having already paid corporation tax on its profits into account. Dividends are classed as income and, as such, are liable for personal taxation and so shareholders have to declare them to HMRC.
An account opened with a clearing bank (few building societies offer current accounts) that provides the ability to draw cash (usually via a debit card) or cheques from the account. Some pay fairly minimal rates of interest if the account is in credit. Most current accounts insist your monthly income (salary or pension) is paid directly in each month and they offer a number of optional services – such as overdrafts and charge cards – which are negotiable but will incur fees.
This is used to compare interest rates for borrowing. It is the total (or “gross”) interest you’ll pay over the life of a loan, including charges and fees. For credit cards where interest is charged at more frequent intervals, the APR includes a “compounding” effect (paying interest on interest). So for a credit card charging 2% interest a month (equating to 24% a year), the APR would actually be 26.82%.