01 Feb What is a Credit Union?
Credit unions help people borrow or save money at lower interest rates than they would receive through traditional lenders. Credit union loans are often considered to be a much lower cost alternative to payday loans in the UK.
First established in the 1940s, these unions are open to members who share a common bond. This common bond could be any number of things such as:
- Working for the same company
- Same occupation
- Same community
- Trade union
- Same church
Credit unions run with primarily three main aims. These are:
- To help its members to save on a regular basis
- To help its members when they are in need of financial assistance
- To provide loans with lower interest rates
How do credit unions work?
Credit unions reinvest profits into the organisation rather than giving this money to shareholders. By doing this, members of the credit union are able to benefit from better interest rates, saving rates and overall dividends.
Credit union statistics
In terms of credit unions by numbers:
- There are more than 500+ unions across the UK
- Between £50 and £3,000 is the average loan amount
- There are at least one million credit union members in the UK
- On average, the fee for borrowing is 1% a month
- The maximum loan term for an unsecured loan is 5 years
- The maximum loan term for a secured loan is 10 years
Where can I find a credit union?
Given that there are at least 500 credit unions in the UK, it is likely there will be one near you. Credit unions come in all different forms and can be:
- Large organisations found on the high street or local council
- Consist of only a few members
What fees do credit unions charge?
As they are not for profit organisations, credit unions charge minimal interest rates, compared to what you may experience with an expensive payday loan.
There is a capped level of interest in place too. Credit unions can only charge up to 3% a month or 42.5% APR on a loan.
Another bonus of using a credit union to obtain a loan is that there are no upfront fees with them. In addition, you wont pay a penalty if you repay the loan early.
However, as with any loan, you may have to pay a small late repayment fee if you do not pay the loan back promptly.
Another excellent advantage of getting a loan with a credit union is that it includes free life insurance. What that means for you as a borrower, is that should you die before fully paying back the loan, the balance would be paid off on your behalf.
What makes credit unions different from other lenders?
- They are not-for-profit
- They can only lend to those who share a common bond
- They rely on the money they receive
The fact that credit unions are not-for-profit is the main aspect that differentiates them from banks or other lenders that provide guarantor loans or payday loans.
Being a not-for-profit affects the criteria, fees and loan amounts given.
For example, credit unions can only provide loans to those who share a commonality with them, such as being in the same profession, or being a part of the same trade union.
This is not the case when it comes to a guarantor or payday lender. Anyone can apply, but the borrower will be subject to credit and affordability checks in order to make sure they can afford to make loan repayments.
Credit unions also rely on the money given to them. Consequently, it is a requirement that borrowers have saved up beforehand and show evidence of this when applying for a loan.