Everything you need to know about borrowing from a credit union
If you’ve heard about credit unions but aren’t sure if they’re relevant to you, we’re here to help. We’ve got the low-down on what credit unions are, what they do, and who can use them.
What is a credit union?
Credit unions are financial organisations set up and run for the sole benefit of their members. The original purpose of credit unions was to offer people in the local community a place to save and responsibly borrow money. Some have grown considerably and offer extra services like basic current accounts or in a few cases, mortgages, and cash ISAs.
Like banks and building societies, the first £85,000 you put into a credit union is protected by the Financial Services Compensation Scheme (FSCS). Credit unions are strictly not-for-profit organisations meaning any profit they make goes into improving their services or is paid as interest to their members.
How does a credit union work?
A credit union is run by a board of directors who’ve been elected by its members. A credit union loans money to its members from the total savings pool from all members. Credit unions are responsible lenders, and only lend money to those that can afford to make the repayments. They also encourage members to save and can offer financial advice to those that need it.
Similar to building societies, credit unions don’t have external shareholders. When you become a member, you also become an owner and get to have a say in how the union is run and attend meetings - if you’d like to.
Who can use a credit union?
Only the members of a credit union can use its services, and all members must share a ‘common bond’. This bond could be geographical, perhaps you live or work in a certain area. Maybe you belong to the same trade union or church as other members. Or the common bond could be through your work. For example, there’s a credit union for NHS staff and one for police officers. You can find out if you’re eligible to join a credit union.
If a member of your family belongs to a credit union then you’ll probably be able to join through them, if you live at the same address.
What are the benefits of borrowing from a credit union?
If you want to borrow a small amount of money, for example, to buy a new washing machine, then credit unions are a good option. The interest rates are usually much lower than you’d find with payday lenders who charge high-interest rates plus fees. The average monthly interest rate for a credit union loan is 1% - and they’re not allowed to charge more than 3% which is the equivalent of 42.6%APR. The APR on a payday loan can be up to 1500%.
Another benefit of borrowing from a credit union is that you can pay back the whole balance early without incurring penalties.
Free life insurance is included, so if you were to die before the loan was fully repaid the balance would be paid off.
How to borrow from a credit union
First, you’ll need to become a member of a credit union before you can borrow money from one. In many cases, you’ll also need to have a savings account with the credit union before they will lend you money, although some unions are starting to loan money to members that don’t have savings accounts.
Each credit union has different joining processes so check with them, but all of them will require identification. If you can’t find a union that you’re eligible to join you could look at what’s involved in setting a credit union up.
How to repay your loan
There are several ways to pay back your credit union loan:
set up a direct debit from your bank account
have payments sent to the credit union directly from your benefits