When looking to raise finance, high street lenders are normally a natural choice. However, credit unions can be a viable alternative, possibly providing cheaper lending and at the same time helping others in your community. You can also save money with a credit union and help your fellow members at the same time. In this article we cover the basic principles of a credit union, how using one works and who can access the services offered.
What is a credit union?
A credit union is a member owned co-operative that offers financial services to its members. There are around 250 credit unions in the UK, which can be community, work or trade union based, serving over a million members.
How can I join a credit union in my area?
There is an online search facility here. Enter your postcode to get details of credit unions in your area.
If you think you may be eligible to join a local credit union, reach out to that organisation for more details on its membership requirements and the services it offers.
How do credit unions work?
Credit unions are operated by the membership of the union for the benefit of the members. The money put in is paid out to members that need access to credit. Any profits would be paid out to the membership or reinvested in the credit union.
The directors that run the credit union are elected by the membership, who would also have the power to remove unpopular directors.
The membership is traditionally made up of individuals who share what is known as a "common bond", such as working in the same industry or living in the same area.
Who can use credit unions in the UK?
Only members of a credit union can use the financial services it offers. The exact joining requirements will vary from one credit union to another. Some credit unions will be able to offer online application services, while others will require you to sign up in person.
You must share a "common bond" with other members in order to become a member yourself. This bond could be living or working in the same area, working for the same employer, or belonging to the same religious institution.
What services are offered by a credit union?
Normally credit unions offer savings accounts and personal loans, but may also offer other financial services.
Credit unions are not-for-profit organisations that are self-funded through deposits made by members, these are then lent as loans to other members. Both saving and lending rates can be lower than with mainstream banks, with the benefit of assisting a community rather than trying just to maximise return. All deposits are covered by the Financial Services Compensation Scheme (FSCS), which means up to £85,000 per person held with a credit union is protected.
Credit unions can also offer life insurance packages, current accounts, prepaid cards and ISAs.
Advantages and disadvantages of credit unions
Here is a summary of the major advantages and disadvantages of credit unions.
Advantages of credit unions
- Loans usually have a lower interest rate
- Credit unions work to benefit members, not to generate profit
- Can be easier to access credit than through a standard lender
- Much less expensive alternative to using payday loan companies
- Some credit unions offer free advice and financial help for members
Disadvantages of credit unions
- Loans tend to be for smaller sums of money compared to a bank loan
- You will not enjoy the more comprehensive service provided by high street banks, such as online banking and phone support
- If you have a good credit rating, you may find a standard lender can offer you a cheaper loan
- Some credit unions will charge a membership or sign-up fee
- You will need to meet the eligibility criteria to join the credit union
- You may be able to get a better return on your savings elsewhere
Check out our 'best personal loans' page to compare commercial alternative.
