Credit Unions, so much better than banks

15 October 2010

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.



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