Credit unions & community banking
What you need to know about borrowing and saving with a local community lender
Credit unions, also sometimes called community banks, offer an alternative to traditional banks and building societies for saving and borrowing – especially if you've found it tricky to access financial products in the past. We explain what credit unions do, who can use them and what they can offer.
Who is this guide for? Those who've had issues accessing borrowing and other services from traditional banks or building societies, and could benefit from the services of a credit union.
Not what you want? If you have a decent credit history, see your acceptance chances for loans and credit cards without affecting your credit report – using our eligibility calculators.
What are credit unions & community banking?
Credit unions are not-for-profit financial providers, set up to be used by members with something in common – this could be living in the same area, working in the same industry, or belonging to a particular trade union. As many credit unions are established in local communities, they are sometimes also referred to as 'community banks'.
Credit unions and community banks typically offer savings accounts and loans, and some also offer mortgages, bank accounts and other financial products. While most credit unions aren’t able to offer table-topping rates for loans or savings, they can be competitive.
What's the difference between a bank and a credit union?
Credit unions are often able to lend to people who might not be able to borrow easily from more traditional financial institutions. And credit unions are often willing to loan smaller amounts at lower rates than most banks or building societies are prepared to do.
For these reasons, credit unions can play an essential part in helping those who are struggling or vulnerable from turning to high-cost or high-risk borrowing – such as payday loans or even loan sharks – which should be avoided at all costs. You can find out more about these types of lending in our Short-term and payday loans guide.
However bad things might seem, ALWAYS avoid using a loan shark. They're unlicensed, they break the law, often go knocking door-to-door and at worst they use horrific methods – including violence and threats of violence against the borrower, their family or children – to get their money repaid.
Who are credit unions for?
While credit unions and community banks can offer a lifeline to those who can't get access to ordinary banking products, or who are having difficulty opening an account with a high street bank, they must still lend responsibly. That means:
Credit unions will only lend money to people who can afford to make the repayments and where it’s responsible to do so. If they can’t lend to you, they might be able to provide or signpost you to other support, such as budget planning, benefits calculators and debt advice.
If you're struggling with your finances, or have debts that you can't afford to repay, see our debt problems & help guide for where to go for free, specialist advice.
Credit unions all have the aim of helping to boost financial education, and some provide help around 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.
However, you don't need to be struggling or financially vulnerable to join a credit union. In reality they're for everyone within their common bond – whether that's geographical or professional.
Payroll partnerships
There's an option through credit unions for people who want to save money, or make loan repayments, through their salary. Many credit unions have a range of 'payroll partnerships' that allow members to save and make repayments through their salary. Some credit unions will also offer a lower interest rate to people who repay and save in this way.
How to find a credit union
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.
Geographical bonds include:
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London Mutual Credit Union: For those who live or work in the boroughs of Camden, Lambeth, Southwark & Westminster.
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Leeds City Credit Union: This credit union is open to anyone who lives or works in the Leeds metropolitan area.
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Kent Savers: This is open to anyone who lives or works in Kent.
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Glasgow Credit Union: Glasgow Credit Union is for those who live or work within Glasgow or the "G" postcode area.
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Clockwise Credit Union: For those who live in Leicester, Leicestershire, Rutland and Northamptonshire.
Professional bonds include:
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Transport Credit Union: This credit union is for employees of major transport companies such as First Group and Virgin Trains.
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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.
The Association of British Credit Unions Limited (ABCUL) has a Find Your Credit Union website. 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.
Credit unions are safe & not-for-profit
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.
Credit union savings have exactly the same protection as normal savings accounts – the Financial Services Compensation Scheme will pay back up to £85,000 per person, per institution. And 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?
How credit union loans work
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 (or they'll charge a much higher interest rate for lending smaller amounts). They're a much cheaper alternative to payday loans, and some credit unions can even get cash to you the same day.
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.
Historically, members of a credit union needed savings with the union before they could borrow. Nowadays, many credit unions are more flexible. For example, if you want to borrow but don't have savings, loan repayments can often be set-up so that some of the money pays off the loan, and some goes into a savings account. That way, you'll build up a savings pot at the same time as paying off your loan.
You can then either use your savings to repay your loan early once it reaches a certain amount – or keep the arrangement as it is, with the bonus of a savings pot at the end. This can be an effective way to get into a savings habit if you've found it difficult to do before.
Credit union savings interest rates
This is 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.
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 significantly more.
Amount borrowed | Typical (APR 12.7%) | Maximum (APR 42.6%) |
|---|---|---|
£100 | £8.90 | £10.80 |
£500 | £44.60 | £54 |
£2000 | £178.40 | £216.15 |
Credit unions will all have their own policies and timescales when it comes to how quickly they can lend to you. Some will be able to turn loans around fairly quickly – and sometimes on the same day – but it will be more likely if you are already a member of the credit union, and you already have a history of saving or borrowing with them (as long as you've repaid on time and any borrowing you're asking for is affordable).
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 as repay a credit union loan.
Credit unions have a duty to lend responsibly, so they'll need to check that you can afford to make the loan repayments, and make sure that lending you money won't create financial problems for you further down the line.
If you are already struggling with debt or other loan repayment, they might decide not to give you a loan. If that does happen, they should be able to signpost you to help with budgeting, debt management or other useful services.
Just like banks and other 'mainstream' lenders, credit unions are likely to run a credit check on your when you apply for a loan as part of their standard checks. However, they can also be more lenient towards people with bad credit, as they take other factors into account when looking at whether a loan is affordable for you.
Can I get a credit union loan straightaway?
Do I need to save with the credit union before borrowing?
Why would a credit union reject me for a loan?
Will a credit union run a credit check on me if I apply for a loan?
How credit union savings work
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.
If you’re after top-paying savings, first compare what the credit union's offering to the accounts in the Top savings guide.
Generally, you can save large or small amounts weekly, monthly or whenever you have spare cash. Credit unions will also help their members to save money, even if it’s just starting with small amounts. This might include 'rounding up' loan payments to the nearest pound and putting the pennies in a savings account. This has helped many people to start a savings pot for the first time.
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 won't know the interest rate 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% to 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.
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.
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.
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.
How do I pay in and withdraw money?
Some credit unions offer other financial products
It's not just savings and loans, some credit unions are starting to offer other financial products such as the below...
Credit union 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). Mortgage rates are fairly competitive currently with those offered from traditional high street lenders, with a 2 year fix at about 5% on average.
However, never pick a mortgage without looking at the whole market. See Cheap mortgage finding for how to locate the best deal.
Credit union bank accounts
Some credit unions offer current accounts. If your union provides a bank account facility, it'll operate 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, or 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.
Credit union car loans (as an alternative to car finance)
Some credit unions offer car loans, as an alternative to car finance. This is a standard, fixed term loan, offered by credit unions such as Co-Op, Leeds and Pennine Community. This will be a better option for some consumers than car finance, but as always, it's best to look at all the options available to you before making a decision.
Credit union prepaid cards & 'credit cards'
Some credit unions offer additional products like pre-paid cards, or other cards that operate in a similar way to a credit card. These cards help people access credit when they need it, and when they don’t need it, the payments you make will be paid into your savings account instead.
These are not offered by all credit unions so it’s important to check if you can access this. For more on how prepaid cards work, see the full MSE guide.
Are there any alternatives to credit unions?
If you've been declined for a credit union loan but still need to borrow money, you can try another non profit community finance provider. There are a small number of community development financial institutions (CDFIs) who provide personal loans. They do charge a higher interest rate than credit unions, and this means they can help people with more complex needs. You can find a responsible lender at Finding Finance, we've listed some of them below:
Not-for-profit community finance providers include:
Fair For You – provides low cost loans for essential items like kitchen and home appliances and furniture. Also provides the Iceland Food Club card to provide no interest loans to spread the cost of food during the school holidays.
Moneyline – offers small loans to help you spread the cost of things such as a washing machine, holidays, home improvements. You can borrow from £200 to £1,000 and make weekly payments from between 14 to 32 weeks, based on what’s affordable for you.
Fair Finance – a leading provider of personal loans and debt advice in London. Through its offices located across London, and online, Fair Finance provides personal loans of up to £3,000 and debt advice to over‐indebted individuals. Their vision is to revolutionise financial services to make it more inclusive and fair for everyone.
Conduit – offers fair and affordable personal loans ranging from £300 to £1,500 as a not for profit alternative to high cost credit and specifically for households who cannot access mainstream credit or banking. Conduit is owned by Five Lamps, a long established charity specialising in social and financial inclusion activities.
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