Credit Unions Local community savings & loans

Credit Unions aren’t just an oasis for those struggling to qualify for high-street borrowing. As community co-operatives, they can also appeal to those who want to benefit their neighbours.

Plus from Jan 2012 legal changes mean credit unions' power has been increased so they can provide extra services to their communities. This Q&A guide tells you how to find a union near you, how safe they are and when to use one.

What exactly are credit unions?

Credit Unions are small non-profit financial organisations set up by members with something in common, to benefit their community.

That common factor may be living in the same town, working in the same industry (e.g. the Police Credit Union) or belonging to a particular trade union.

Sadly under publicised, roughly 500 credit unions cover the UK offering loans, savings and current accounts to their members, and almost a million Brits are members.

Who are they for?

They’re there to provide a financial community, where its members mutually benefit…as there’s no profit for third party shareholders.

This can mean helping those who can’t get access to ordinary bank products; a lifeline in less well-off communities for folks grappling with their finances. Plus, they can be a welcome alternative to payday loans or doorstep lending.

Yet, they're not just for those struggling financially, they also appeal to those who want to bank ethically and benefit their community, and some larger credit unions, such as the police or the big Glasgow union, offer products that can beat mainstream finance.

Their primary functions are savings and borrowing, although other services that may be available include current accounts (similar to a Basic Bank Account), Cash ISAs or sometimes funeral plans. For more on their role see the ABCUL, the credit union trade body, website.

Who can join a union?

They’re all specific, so you need to check if there’s one that suits you in your area.

From 2012 onwards the joining rules have relaxed a little, but generally, to be part of a credit union, you need to share a ‘common bond’ with other members, such as:

• Live or work in the same area

• Work for the same employer as other members

• Belong to the same church, trade union or other association

New for 2012:

• Organisations, as well as individuals, can now become members

How do I find my nearest?

There are a few ways to find a credit union near you and check out precisely what your local credit union offers:

• Search 450 unions online. Use the Find Your Credit Union website from the trade body ABCUL which does exactly what it says on the tin. You can search by postcode, employment type, or other organisations that you think may have set up a union.

• Over the phone: If you'd prefer, you can call Abcul on 0800 015 3060.

• Local searches: Some further online tools are the ACE Credit Union Services, Scottish League of Credit Unions and Northern Money (which covers Northumberland, Tyne & Wear, Durham, Tees Valley and Cumbria) databases.

You can also simply try your Yellow Pages or ask at your local Citizens Advice bureau for contact details.

Some examples of the bigger credit unions are:

Once you’re a member you can become involved in the decision making and if you become interested in how it all works, you can often help run it too. You can also usually stay in the union if you're not in the bond anymore, for example if you move house or jobs, although the smaller unions may not have the resources to be able to deal with this.

Can’t find a credit union that fits?

If you’re feeling like dedicating time and effort, then you can always set up your own credit union, though this won’t be quick, it’ll usually take up to three years and there are strict procedures to follow. See the ABCUL guidance for more info.

How do they work?

Credit unions aim to help you take control of your money by encouraging you to save what you can, and borrow only what you can afford to repay.

In essence, they're a savings and loan co-operative, which just means the members pool their savings to lend to one another and help to run the credit union.

This is done in a ‘not-for-profit’ way, so the cash is only used to run the services and reward the members…and NOT to pay outside shareholders, like most other financial institutions.

Throughout the year, those running the credit unions must put aside enough money to ensure they don’t go bust. Any money that’s left over is channelled back to those who’ve a savings account or it’s used to try and improve the overall service.

To keep all the money safe, credit unions can’t lend out all their members’ savings or plough the remainder into anything that carries too much risk. Plus all money in savings unions has the same FSCS government protection as bank savings accounts.

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What products do they offer?

Most credit unions don’t offer rates for larger loans or savings that will trouble the best-buy tables. Though it is worth bearing in mind, especially with saving, that by putting money in there, you’re actually helping others in your community.

Yet if you’re after a top paying savings, or have a reasonable Credit Rating and want to borrow cheaply; then never take out a product without first comparing it to the those in the Top Savings or Cheap Loans guides.

Products on offer include...

Loans: Where most credit unions come into their own, is for loans of smaller amounts, under £3,000. Many people who borrow these amounts would only be able to resort to doorstep lending or payday loans as an alternative, and compared to those, credit unions have halos. See the loans section below for more info.

Savings and bank accounts: All unions offer some form of savings account and around 25 now offer current accounts. See the savings section below for more info.

Prepaid cards: Five unions around the UK (Enterprise Credit Union in Liverpool, Pendle Community Credit Union in Lancashire, City of Plymouth Credit Union, 1st Alliance Ayrshire Credit Union and First Dorset Credit Union) are currently trialing a new Prepaid card service. See the Prepaid Cards guide for how the cards work.

It's not just about the products

One of the main objectives of a credit union is "The training and education of the members in the wise use of money and in the management of their financial affairs."

While not all are able to provide a structured programme about budgeting or debt management, all are involved in helping to improve the financial literacy of their members (and we're proud the MSE Charity is able to help fund some of these projects).

Some of the projects that may be available include budgeting accounts, where you pay in a fixed amount each week or month which is used to pay agreed household bills on your behalf, or benefits direct accounts, where your benefits are paid directly to the credit union and you can withdraw cash needed for day to day spending.

How do union loans/borrowing work?

A key appeal of credit unions is a willingness to make small loans of £50 to £3,000, which high-street banks won’t do.

In the old days, a credit union kept a strict rule that it would only lend to those who already had savings but this is changing: some will now lend to those who are new to the organisation.

What’s the interest rate?

This is a bit of a “how long is a piece of string?” question. Sometimes loans can be under 6% a year, but the interest is usually around 12.7% APR (1% a month) going up to a maximum 26.8% APR. So if you borrow £100 over a year at most you’ll repay £126

As noted these rates are higher than the cheapest Credit Cards or Loans, but are MASSIVELY cheaper than the products offered to those who are usually turned down for loans from high street banks when rates can be 200% or more.

What are the monthly repayments on a one year loan?

Amount Borrowed	Typical (APR 12.7%)	Maximum (APR 26.8%)
£100	£8.90	£9.60
£500	£44.60	£48
£2000	£178.40	£191.80

There aren’t any repayment penalties

Credit union loans usually carry NO hidden charges or penalties if you can pay off the loan early. Plus life cover is included in the loan at no extra cost so if you die before paying off the loan, the insurance would repay the loan for you.

How long can I borrow for?

The vast majority of credit unions will give you money for a personal loan for up to five years and up to 10 years for a loan secured on your property (meaning if you can’t repay it has a claim on your home).

However, you could find that some will be happy to lend up to 10 years for an unsecured loan, and up to 25 years for a secured one.

Like a regular bank, much also depends on YOU. You could find that some credit unions will insist you regularly save for several months first, to ensure you remain committed, or make checks to be sure that you have enough to be able to pay all your other bills as well repay a credit union loan.

As an alternative to a credit union you may find that a Community Development Finance Institution is able to help you with a small loan.

How do savings/bank accounts work?

These tend to be ultra flexible, allowing you to save amounts large or small weekly, monthly or whenever you can. Bigger credit unions will have branches that operate like many banks, and collection points such as local post offices; some smaller unions will have just a couple of opening hours a week.

If your union provides a bank account facility it operates very much like a Basic Bank Account. You can get cash, set up direct debits and standing orders etc. but you can't get a chequebook or overdraft. There are now around 25 unions that provide current accounts which are managed by the Co-operative bank.

How much do the savings accounts pay?

Until 2012, rather than interest like normal savings accounts, all credit unions have been paying a yearly dividend on savings. Typically, the rate is 2 or 3%, but it could be as low as 0% or as high as 8% of the sum saved.

The dividend works as a ‘payment back’ in proportion to the amount you had in. This means, if the credit union makes money, you got a cut and the amount depended on how much you’d saved.

Yet under this system, as dividends are paid before tax, it is up to the individual to declare tax on any earnings, although your union will help with the paperwork.

The new powers given to unions mean they are now able to offer interest on their savings products. While this may take a while to role out, it'll eventually be easier to compare the rates between your local union and other providers. Contact yours to see what it's offering, as an example Glasgow Credit Union has recently offered a 4% Cash ISA.

If you're with one of the employment linked unions, you're often allowed to set up savings direct from your payroll which makes the whole process much easier.

How do I withdraw money?

This can be done directly at your local credit union office, by cashing a cheque at a post office, or, with some of the larger unions, with a debit card from an ordinary high-street cash machine.

Any other benefits?

Life savings insurance is included with most savings accounts, at no extra cost. This means that if you die, the amount of savings can be as much as doubled by the insurance and paid to whoever you choose. Further details on this are available from the individual credit unions.

How safe are savings in a credit union?

Credit Unions are small organisations and lack the enormous amounts of money of the big banks. On the other hand the regulations mean they must be far more prudent and not over lend.

As with any type of savings, the most important thing to consider is “in the event it went bust, am I protected?” and the answer is yes.

Credit union savings have exactly the same protection as normal savings accounts; in other words the Financial Services Compensation Scheme will pay back £85,000 per person, per institution. For more info see the Safe Savings guide.