What exactly is a credit union?
Credit unions are financial-organisations that are set up to benefit the community and are not-for-profit, which means the aim isn’t purely to make money like other lenders. They are community-focused and currently around 500 exist across the UK. A credit union will mainly provide small loans to members, together with access to both current and savings accounts.
How do credit unions work?
In it’s simplest form, a credit union helps the community to mange money responsibly. This is done by members pooling money together, which is then lent to other members who require a loan (which a member can afford to pay back).
As they are non-profit organisations, any surplus money is used to pay for the running of the service, as well as rewarding members via interest rates on savings/current accounts. The big difference is the not-for-profit element, as unlike payday loan companies and banks, there isn’t a consistent focus on maximizing profits (via high interest rates on loans) for shareholders.
What financial risks are there with a credit union?
Credit unions are under the same rules and regulations as the banks, which means any money in savings accounts has the same Financial Services Compensation Scheme government protection. This will pay back up to £85,000 per person for each institution you have placed your money with.
They also cannot lend out all of their members’ money in one go to other members and have to put aside money each month to ensure they have financial stability if there is an issue with a borrower repaying a loan.
How are credit union loans provided?
You first need to get in contact with your local credit union to discuss the options available, as many will insist you save with them for a few months first so they can ensure you will be able to pay back money lent.
After this, you’ll be able to apply for a loan of anything between £50 and £3,000 based on your circumstances. Like any other loan, interest is charged on it and this varies from around 12.7% APR up to a maximum of 26.8% APR.
The loan repayment period will depend on the total amount borrowed, as well as whether it’s secured, for example secured against your house so that an asset is recovered if the loan isn’t re-payed.
One importance difference from some other providers is that you won’t incur financial penalties if you’re able to repay the loan early and life insurance is always included. If for any reason you died before paying the balance off in-full, the insurer would pay it for you, rather than it becoming your family’s responsibility as part of your estate.
Are credit unions right for me?
For savers, credit unions offer an alternative to banks for anyone looking to save, especially if you’d prefer to be making a difference in your local community. The risks carried are the same but you may find that you have less access to other products offered by your bank, such as internet banking.
For borrowers, using a credit union is another source of funding if you’re struggling to get a small loan with your bank. Many people compare credit unions with payday loan companies, as both offer short-term loans up to around £3,000. The interest rates that you’ll have to pay on the loan tend to be vastly differently, mainly because credit unions aren’t run for profit. Therefore the total loan repayment is very likely to be considerably less than from a payday loan. However, interest rates are usually higher than the banks so it’s worth speaking to your bank manager first to get their offer of the best rate, before speaking to your local credit union.