Credit Unions Explained

Posted byDaniel Tannenbaum | Category Blog | Date 19 October 2016

What is a Credit Union?

Credit Unions were founded in the 1940s as not-for-profit organisations to help people save money or borrow at low interest rates. The founders of a credit union are joined by a common bond, whether they work together, belong to the same community or church, but their aim is to help local people save money rather than charge usurious rates.



Source: MoneyAdviceService

Rather than profits being passed onto shareholders, the money is reinvested and recycled into the community organisation to help its members get better saving rates, dividends and lower interest rates. Credit unions can be large organisations found on the high street, your local council or they can simply consist of a few members. They are regulated by the Prudential Regulatory Authority and the Financial Conduct Authority.

Credit Unions by numbers

  • 500+ credit unions in the UK
  • 1 million+ members
  • 1% a month is the fee for borrowing
  • £50 to £3,000 is the typical loan amount
  • 5 years is the maximum loan term of an unsecured product
  • 10 years is the maximum loan term of a secured product
  • 2-3% is the typical savings rate per year (current accounts, ISAs and mortgages are available too)

Source: MoneySavingExpert

Below is a map of the credit unions in London:

How much does a Credit Union charge?

Credit unions offer very low interest rates because they are not for profit organisations, therefore they are seen as a strong alternative to mainstream lending like payday loans.

There is a cap on the amount of interest they can charge on their loans of 3% a month or 42.6% a year APR. The cap in Northern Ireland is 1% a month. This is extremely low considering that used to charge 1% per day and now payday lenders are capped by the FCA to charge a maximum of 0.8% per day.

Highlighting the not-for-profit nature of the business, there are no upfront fees for credit union loans and no penalties if you repay the loan early. As with any lender, you will be required to sign a contract and repay your loan on time, with limited or no late repayment fees.

Another nice perk is that all credit unions include free life insurance as part of any loan agreement – so if you die before repaying the loan, the balance would be paid off for you and your relatives won’t need to worry.

How is a credit union loan different to a payday loan, guarantor loan or bank?

The main difference between credit unions and other mainstream lenders is that they are not for profit so this has an impact on the criteria, loan amount, fees and more.

Criteria: Credit union loans are only available to those who share a common bond with that particular union, whether they live within the municipality, share the same profession (e.g Police Credit Union) or belong to the same trade union.  You are only usually eligible to borrow from 1 or 2 unions and you can find your nearest one here.

Credit unions also rely on the money they get in, so it is a requirement to have  some money saved up beforehand and show proof of this when applying for a loan.

Such products are usually aimed at those that have been turned down by mainstream companies due to their employment, eligibility or credit rating. However, through the use of the community, they are able to get the funds they need and pay low rates of interest.

In contrast, anyone can apply for a payday loan, guarantor product or bank loan and they will be subject to various credit and affordability checks to assess their eligibility. For instance, you can be living in Scotland and apply with a lender in London, over the phone or online, there is no common bond needed.

Loan amount: Credit unions tend to deal with lower amounts starting from £50 to £3,000 for unsecured products and more for secured loans. With other financial lending products, you may be able to borrow significantly more because they are for-profit organisations and will be charging much higher rates.

Fees: As mentioned, the fees for credit union loans are extremely low in comparison to other financial products available online and on the high street. With fees of around 1% per month and a maximum APR of 42.6%, it is a viable alternative. Below, we show the costs of CU loans compared to other products and it is clear just how much cheaper they are.

Loan Product Amount Borrowed APR Total Interest 6 months Repayment
Payday Loans £1,000 1270.1% £808.02 £1,802.02
Guarantor Loans £1,000 49.90% £618.36 £1,618.34
Credit Union £1,000 26.80% £63.50 £1,063.50
Balance Transfer Credit Card £1,000 2.9% £29.00 £1,029.00

Duration: Credit union loans can be as long as other standard products you’ll see with unsecured available for 5 years and secured loans for up to 10 years. One interesting point is the speed at which you get the loan – with banks and payday lenders able to offer funds on the same day, credit unions can take up to a week to transfer your funds, which is another factor you need to consider when borrowing and how urgently you need the finance.

Credit unions are great and low cost, but can take around a week to transfer you the funds.

Repayments: You can repay your loans similar to other products on the high street with options including direct debit from your bank account, directly through your wages at work (ideal for work related schemes), over the counter, Paypoint and directly from your benefits.

You are required to make repayments on your loans like you would with Amigo, Quickquid or HSBC. But because of the charity, not for profit philosophy, you can expect greater leniency such as no default fees, no heavy phone calls and certainly no bailiffs knocking on the door. If you wish to compare, you can read about what happens if you cannot repay your guarantor loan here.

Are Credit Unions Safe?

Yes, absolutely. If you are considering saving with a credit union, you get the same protection as normal savings accounts with your bank. The Financial Services Compensation Scheme will pay back up to £75,000 per person and most credit unions will only let you borrow a maximum of £10,000 to £15,000 anyway so your money will be safe and sound.