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Credit Unions
Local community savings and loans
Updated 12 September 2022
Credit unions offer an alternative to traditional banks and building societies for saving and borrowing. They can sometimes beat the rates on the high street. We explain how to find a credit union, how they keep your money safe, and when you should use them.
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What is a credit union? Plus five need-to-knows
A credit union is a community savings and loans provider. Traditionally, credit unions have been small, non-profit financial organisations set up by members with something in common, such as living in the same town, working in the same industry (eg, the Police Credit Union) or belonging to a particular trade union.
Many credit unions are professionalising, having moved away from the "man and his ledger in the church hall collecting savings and offering loans". Many now offer products online, and most have some form of commercial premises.
Credit unions provide a financial community - members mutually benefit as there's no profit for third-party shareholders.
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You don't have to be struggling to benefit from joining a credit union
Because they're there to provide a financial community, this can often mean they offer a lifeline to those who can't get access to ordinary bank products. But in reality credit unions are for everyone. 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."
Credit unions all help boost financial literacy and some even provide structured programmes about budgeting or debt management.
For example, some offer 'budgeting accounts', where you pay in a fixed amount each week or month 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.
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Credit unions offer loans and savings accounts - but some even offer mortgages
Credit unions typically offer savings accounts and loans, but some even offer mortgages. While most credit unions don’t offer table-topping rates for larger loans or savings - some do, so it's always worth checking. And by putting money in a credit union, you’re helping others in the community too.
- Loans. Most credit unions come into their own for loans of smaller amounts, under £3,000. Many people who borrow these amounts would otherwise only be able to resort to doorstep lending or payday loans as an alternative. Compared to those, credit unions have halos. See the loans section below for more info.
You can also use the loan to buy white goods via the Smarterbuys scheme. This is a collective buying project that allows you to pay for goods via a credit union loan as a way to avoid payday loans, weekly payment stores or loan sharks.
If you have a good credit score, it's worth checking out the best buys in the cheap loans guide. Rates are very low at the moment, so check if the high street can help you out in our Cheap Loans guides or use our loan calculator.
- Savings. All unions offer some form of savings account. The difference between these and high street accounts is that credit union savings often pay you a dividend, which is dependent on how well the credit union's done that year, rather than a confirmed interest rate. See the savings section below for more information.
If you’re after top-paying savings, first compare what the credit union's offering to the accounts in the Top Savings guide.
- Current accounts. Some credit unions offer current accounts. If your union provides a bank account facility, it'll operate very much like a Basic Bank Account.
- Mortgages. These are only offered by a few credit unions, such as Glasgow, Scotwest & Capital Credit Unions (all in Scotland) and No 1 Copperpot Credit Union (for police staff). However, never pick a mortgage without looking at the whole market. See Cheap Mortgage Finding for how to locate the best deal.
- Prepaid cards. Some credit unions offer a prepaid card service. See the Prepaid Cards guide for how the cards work.
- Loans. Most credit unions come into their own for loans of smaller amounts, under £3,000. Many people who borrow these amounts would otherwise only be able to resort to doorstep lending or payday loans as an alternative. Compared to those, credit unions have halos. See the loans section below for more info.
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To join a credit union you need to share a common bond with members
Generally, to become part of a credit union, you need to share a ‘common bond’ with other members. This means living in a particular area or being in a certain profession. You can also usually stay in the union if you're not in the bond anymore, for example if you move house or job, although smaller unions may not have the resources to be able to deal with this.
There are a few different things that can form the common bond for a credit union. Most commonly these are: geographical bonds or professional bonds.
Examples of "geographical bonds"
- London Mutual Credit Union: For those who live or work in the boroughs of Camden, Lambeth, Southwark & Westminster.
- Leeds City Credit Union: This credit union is open to anyone who lives or works in the Leeds metropolitan area.
- Kent Savers: This is open to anyone who lives or works in Kent.
- Glasgow Credit Union: Glasgow Credit Union is for those who live or work within Glasgow or the "G" postcode area.
Examples of "professional bonds"
- Transport Credit Union: This credit union is for employees of major transport companies such as First Group and Virgin Trains.
- NHS Credit Union: Those who work for the NHS (or family members who live in the same household, in Scotland or the north of England - north east, north west and Yorkshire & Humberside) can join this credit union.
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How to find a credit union
There are a number ways to find a credit union - it's often based on your location but it can also be because you belong to a certain profession. The Association of British Credit Unions Limited (ABCUL) has a Find Your Credit Union website, which does exactly what it says on the tin. You can search by postcode, employment type, or other organisations that you think may have a union. If you'd prefer, you can call ABCUL on 0161 832 3694.
Other online tools include the ACE Credit Union Services, Scottish League of Credit Unions, creditunion.ie (Republic of Ireland-based, but covers Northern Ireland) databases.
Can't find a credit union that fits?
If you feel like dedicating time and effort, then you can always set up your own credit union. It won't be quick, it usually takes up to three years and there are strict procedures to follow. See the ABCUL guidance for more info.
As an alternative to a credit union, you may find that the Responsible Finance network is able to help you with a small loan.
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Credit unions are not-for-profit - and your money's safe
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 savings and loan co-operatives, where 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 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 got a savings account (to pay them interest) or it’s used to try to 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. As with any type of savings, the most important thing to consider is "in the event the credit union went bust, is my cash protected?". 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. In any case, many credit unions limit the total you can save with them to £10,000 or £15,000. For more information on this protection, see Are Your Savings Safe?
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How borrowing from a credit union works
A key appeal of credit unions is a willingness to make small loans of £50 to £3,000, which most high-street banks won’t do. They're a much cheaper alternative to payday loans, and some credit unions can even get cash to you the same day.
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.
Interest rates vary based on the amount you want to borrow, length of the loan and which credit union you borrow from
Sometimes credit union loans can be under 6%, but generally the interest is often around 12.7% APR (1% a month) going up to a maximum capped rate of 42.6% APR (3% a month). The cap in Northern Ireland is 1% a month.
This means if you borrow £100 over a year, at most you’ll repay £143(ish) - these rates ARE HIGHER than the cheapest credit cards or loans. But they're much cheaper than the products offered to those who are usually turned down for loans from high street banks, when APRs can be more than 1000%.
What are the monthly repayments on a one-year loan?
| Amount borrowed | Typical (APR 12.7%) | Maximum (APR 42.6%) |
|---|---|---|
| £100 | £8.90 | £10.80 |
| £500 | £44.60 | £54 |
| £2000 | £178.40 | £216.15 |
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 25 years for a loan secured on your property (meaning if you can’t repay, it has a claim on your home).
Some credit unions have also started to offer payday-style loans, meaning you can take £100-500 over a month, or a few months. But the big difference is the credit union's maximum APR - a legal cap - is 42.6%.
Do I need to save with the credit union before borrowing?
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 you have enough to be able to pay all your other bills as well repay a credit union loan.
What if I want to repay the loan early?
Credit union loans usually carry NO hidden charges or penalties if you can pay off the loan early (unlike high street loans, where you could pay a charge).
Can I get life cover with my loan?
Life cover's also included in the loan at no extra cost. So if you die before paying off the loan, the credit union's insurer would repay the loan for you. It'd mean one less thing for your estate to deal with in a difficult time.
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How saving with a credit union works
Generally, you can save large or small amounts weekly, monthly or whenever you have spare cash.
Bigger credit unions may have online or app banking, and have branches and collection points such as local post offices; some smaller unions will have just a couple of opening hours a week and likely be based in a community centre or church hall.
You don't know what interest you'll get until the end of the year
Credit union savings usually offer a dividend rate rather than an interest rate. This means that it depends how well the credit union does that year - so you don't know what you'll get until the end of the year. Typically, dividend rates are 1-3%, but it could be as low as 0% or as high as 8% of the sum saved.
Dividends are paid before tax, so it's up to you to declare tax on any earnings, though they fall under the personal savings allowance, so you may not need to pay any tax.
It used to be that some credit unions paid more than the top high street savings accounts. This has taken a dip somewhat in recent years, but it can still be possible to find decent rates.
Check your local credit union: Use ABCUL's Find Your Credit Union website to find your local union and what it's offering for its savings accounts.
But you can sometimes get a fixed savings account
Some credit unions, usually the larger ones with thousands of members, now offer accounts with advertised interest rates, like bank savings accounts. You can identify these as they'll have a rate, and it'll say "AER" (Annual Equivalent Rate) after it.
Most credit union savings accounts aren't table-topping, but there are some decent rates out there if you search.
Find what your local union's offering: Use ABCUL's Find Your Credit Union website to find your local union.
Some even offer cash ISAs
Some credit unions now offer cash ISAs as part of their savings range. A cash ISA is a savings account you don't pay tax on, but there's a limit to how much you can save each year (currently £20,000). For more information on ISAs, read the Cash ISA guide.
Some credit unions offer cash ISA accounts which get close to rates offered on the high street. For example Partners Credit Union, which is open to anyone who lives and works in Merseyside, offers a fixed rate 1% on its cash ISA account.
Use ABCUL's Find Your Credit Union website to find a credit union you can join.
How do I pay in and withdraw money?
You can pay in at the local credit union office, or sometimes through a post office. Some accept BACS or debit card payments. If you're with one of the employment-linked unions, you're often allowed to save direct from your payroll, which makes the process much easier.
Withdrawals can be made 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. The larger credit unions now allow online withdrawals to a specified account.
Can I get any other benefits?
Life savings insurance is included with most savings accounts, at no extra cost. If you die your 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.
Broadly speaking, savings in a bank or credit union are protected up to £85,000. Our Are my Savings Safe? guide tells you full info of what protection's out there, and lets you check if your credit union is protected.
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Do credit unions do other products?
If your union provides a bank account facility, it operates very much like a Basic Bank Account.
Most credit unions will charge you for the account - this is to cover costs, as they are not-for-profit entities. The charge can be as little as £1.50 a week or up to around £5. The charge also means you don't pay fees for paying late or making an error. Otherwise, credit union bank accounts generally operate like any other bank account.
You can have your salary paid in, set up direct debits and standing orders from the accounts, take money out at cash machines, and some will issue debit cards so you can use them in shops.
However, you won't get an overdraft or a chequebook, so if this is what you need, you're better off looking on the high street. The other thing you won't get from a credit union bank account is the seven-day switching guarantee that high street banks offer. This is a voluntary standard and credit unions aren't signed up to it.
You can still switch your bank account to a credit union - it's just likely to take up to a month to complete the switch.
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