For many people struggling to qualify for borrowing from a bank, credit unions are their best alternative. A credit union is a not-for-profit organisation that provides options to borrow money at very reasonable prices, among others. Credit unions also have great savings options, which can, sometimes, beat high-street rates, despite the low savings rates in the current market. However, before you commit to a credit union loan and start looking for a union near you, you need to make sure it is the right time to turn to a credit union and find out how safe credit unions really are. We have created this guide for this purpose.
What You Need to Know About Credit Unions
1) A Credit Union is a Community Loans & Savings Provider
At the moment, there are about 500 credit unions in the UK, and the number of Brits trusting one keeps rising (around one million members so far). Traditionally, a credit union has been a small financial organisation (non-profit) created to serve people (within a community) in need of money, set up by members that wanted to benefit their community. The members of a union have something in common. For example, they could be working in the same industry (see the Police Credit Union), living in the same area, or belonging to the same trade union.
Over the years, credit unions became more widespread and more tech-forward. Today, they are offering their products online while most of them also have some form of commercial premises. What is more, both individuals and organisations can join unions now.
2) Credit Unions Serve Everybody; Not Just The Fortunate Few
The idea behind the creation of credit unions is that members of a community mutually benefit. Since they are non-profit organisations set up by community members, no third-party shareholders exist. More than often, credit unions help people that are not eligible for ordinary bank products; people that struggle with their finances. That aside, they can be a great alternative to doorstep lending or payday loans.
3) Some Credit Unions Also Offer Current Accounts & Mortgages
Besides putting money in a savings and loans provider that helps your community (so, you actually help others in the same community by keeping your money in a credit union), the rates you will find are also usually very reasonable, even for larger savings or loans. However, as there are a few credit unions whose loan rates are rather high, it is always good to check first. Having said that, there are credit unions that also offer from mortgages to current accounts so it is definitely worth checking.
4) You May Qualify To Join More Than One Credit Unions
As previously mentioned, credit union members share a common bond with one another. So, you may be eligible to join more than one credit unions. For example, you could join a credit union based on your residency and one based on your profession. Once a member, you can attend member meetings (i.e. AGMs) and become involved in decision-making or even offer your help to run the union (some smaller ones are usually looking for such assistance). And, if you are no longer in the same bond with the credit union (i.e. you have changed career or moved house), you might be able to stay in the union (this may not be the case with smaller unions that don’t have the resources to handle this).
To find out if you are eligible to join a credit union near you, you can check out FYCU’s website and see what your local union offers. You can search by postcode, type of employment, and even other associations that you believe might have a union (i.e. church group).
5) Your Money is Safe With Credit Unions
Credit unions actually encourage you to save money (to the best of your abilities) and only borrow what you really can afford to repay. That way, they help you take control of your finances and money.
Here is how a credit union works: the members pool their savings and then lend to one another while also help run the union at the same time. These savings and loan co-operatives are run in a not-for-profit fashion, so the cash is used to reward the members and run the services of the union rather than pay third-party shareholders like most financial institutions out there. So, your money is safe with them.
FAQs About Borrowing From a Credit Union
Q: I only need a couple hundred pounds. Can I borrow from a union?
A: You can borrow from as little as £50 from a credit union and, in many cases, even have the cash you need the very same day (definitely not something you can do with most high-street banks). Not long ago, credit unions only lent money to members that already had savings in the union. However, this has changed now and they will lend to new members as well.
Q: Why not get a payday loan instead?
A: A credit union will not ask for repayments with a high-interest rate. With a payday loan, you must repay in a month (or deal with hefty interest rates) and the money will be taken from your paycheck, whether you like it or not.
Q: What is the interest rate?
A: Sometimes, loans are below 6% annually. However, the interest is usually around 1% per month (12.7APR) going up to a maximum of 3% per month (42.6%). So, for a loan of, say, £100, you will not repay more than around £143 over a year.
Although these rates are not lower than the cheapest loans or credit cards out there, there are HUGELY cheaper than the financial products you will be offered if you are turned down for a loan from a high street bank. The interest rates in this case can run into 100s, even 1000s of percent.
Q: What is the maximum amount of time I can borrow for?
A: You can get a personal loan for up to 5 years. If the loan is secured on your property (if you can’t repay the loan, the union has the right to claim your home), it can be for up to 10 years. You may also find payday-style loans offered by some unions. In this case, you can take between £100 and £500 over a month (could be over a few months, depending on the regulations of the credit union). If you consider that a payday lender’s representative APR is over 1000% and that the union’s maximum APR is 42.6%, you can understand the big difference, right?
Q: Are there any charges for early repayment?
A: Absolutely not. There are no penalties or hidden charges (at least, in the vast majority of cases) if you pay off the loan early.
Every time you get a loan from a credit union, you also get a FREE life cover. This means that if you die before you clear the loan, the insurer of the credit union will repay the loan for you, rather than pass it on to your dependants.