There are over 40,000 Credit Unions operating worldwide, helping their members to borrow and save money. They have been around for over 70 years but have become increasingly popular in the UK in recent times.
In this article about credit unions we shall be looking at:
- What credit unions are
- How to become a member
- Who credit unions help
- The kinds of products they offer
- How to borrow with a credit union
- How to save money with a credit union
- What protection your savings have
Credit Unions – What are they all about?
Credit unions are all about people helping people. The idea originated in Germany in the 1800’s when German peasants were forced to pay exuberant rates to their landlords in order to loan money. In order to overcome this they pooled their resources and started to help one another by setting up saving and borrowing schemes amongst themselves.
Modern day credit unions are set up by local communities, unions or within work places. Their members must have a common bond, whether it is through work, having a similar profession or living in the same area. Sometimes they may be members of the same church or trade union.
They are run by the members themselves and are non-profit organisations. Any financial gains are used to help their members and improve the service that they provide, unlike other financial institutions that spend their profits by rewarding their shareholders. Many credit unions are becoming more professional with premisses and web pages unlike years ago, when it would have operated with ledgers from a church hall.
How do I qualify to become a member?
They are all different, so the first thing that you would have to do is to check if there is one that meets your needs in your area or one for your profession. You can do this by calling ABCUL on 0800 015 3060 or checking on their website. You can enter your personal details or postcode and check credit unions for your employment type of other professions that you may be eligible to join. You may be able to join more than one and can usually remain a member once your business with them has been concluded.
Once you become a member, you will be able to attend AGMs and other meetings and get involved in the running and decision making within the organisation. Some credit unions have thousands of members, while others can be fairly small. They are all regulated by the Financial Conduct Authority and the Prudential Regulatory Authority.
Why should I use a credit union?
Credit unions are not just for people who could not otherwise get a loan from high street banks. They are designed to help all the community in all areas of their finances. They can offer help for people who have trouble budgeting their finances by taking an agreed fixed amount every month from their benefits to cover household bills. In less fortunate areas they can help their members get small amounts of cash, thus avoiding having to take out expensive payday loans or borrowing from doorstep lenders.
What are the aims of a credit union?
Credit unions have three main aims:
- To help its members secure loans with low interest rates
- To help and encourage its members to save money regularly
- To assist members who may have financial problems
Credit unions are responsible lenders and won’t lend to members that they feel will be unable to repay any money that has been borrowed.
Credit unions are responsible lenders and will not lend to members that they feel will be unable to repay any money that has been borrowed. For this reason your income and sometimes the amount that you have been able to save in the past will be assessed. They also have a cap on the interest that they can charge on loans which is 3% a month or 42.6% a year APR. in Northern Ireland the cap is 1% a month.
What do credit unions offer?
Credit unions can offer loans, savings accounts and some can offer current accounts that are facilitated by the Co-operative Bank. There is a small charge of 1.50 pounds a week that pays for the running costs of the account and you will not be charged for late payments or for any errors that you make.
So what have we learned so far?
- Credit unions have been around for a long time
- They are set up and run by communities to help each other with financial issues
- Their members share common bonds
- You can be involved in the organisation
- They can help members with low credit ratings secure loans
- They offer many different services
How do credit union loans work?
Credit unions are willing to make small loans of between 50 and 3000 pounds, unlike some high street banks. They used to lend exclusively to members that had savings, but this is changing now. Their interest rates can be 6% a year, but generally they are around 12.7% APR (1% a month) and rising to a capped rate of 42.6% APR (3% a month). This means that a 100 pound loan over the course of a year would see you returning around 143 pounds maximum.
The interest on the loan is charged on the reducing balance of the amount borrowed. This means that if you pay your instalments weekly, you will end up paying less interest over all. Although these rates are more expensive than the cheapest credit cards or loans, they are much more economical than other means of lending, that people who cannot get credit from high street banks usually resort to borrowing from.
How many years can I borrow for?
Most personal loans can be borrowed for up to five years and up to ten if the loan is secured. A few are able to lend for up to 25 years. If you use your home to secure a loan and do not repay it then the credit union will have a claim on your property. Many credit unions have begun to offer payday style loans of between 100 and 500 pounds that can be taken over a month or two. With a credit union loan the APR is 42.6% maximum whilst a payday loan company can charge 1000%+ APR.
Most personal loans can be borrowed for up to five years and up to ten if the loan is secured. A few are able to lend for up to 25 years.
You may have to save first, depending on the credit union
Although this was once mandatory, many credit unions do not insist on this any more. Some though, may want to see that you are able to pay your household bills as well as your loan repayments and ask you to save with them first so that they can monitor your behaviour and ensure that you remain committed.
What happens if I pay the loan off early?
Credit union loans do not have hidden charges or incur penalties if the loan is prepaid before the agreed time limit.
Does the loan have life cover?
If you were to die before the loan had been repaid then the credit union’s insurers would repay the loan on your behalf. There is no charge for this facility. It means that your loved ones would have one less thing to concern themselves with at a difficult time.
How can I pay back my loan?
There are several ways to pay back a credit union loan, although not all credit unions will be able to offer all of these options. You can make face to face payments at their headquarters, or make a direct debit straight from your bank account. If your employer is part of your credit union then the repayments can be deducted from your salary. Many credit unions can issue Paypoint cards meaning that you can pay back your loan at local shops. Some credit unions take benefits payments, keep the repayment and then pay you what is remaining.
How can I save with a credit union?
Credit unions have many different types of saving accounts but you should always check around to see if you can find better rates on the high street. One thing to consider though, is that by saving your money with them you would be helping the community.
You can save large or small amounts weekly or whenever you are able. Small credit unions may operate from a community centre or a church hall a few hours a week, but larger ones may have on-line banking or collection points at local post offices or branches.
What are the typical rates that credit unions offer?
Credit union savings accounts tend to offer a dividend rate as opposed to an interest rate. What this means is that the interest rate will be calculated depending on how well the credit union performs that year and you will not know the rate before. The rates tend to be between 1 and 3%, but could be as high as 8% or as low as 0% of the total savings. Some credit union’s dividends have been known to surpass the rates offered by the high street banks. You can check on line for more information. It is your choice as to whether you declare any earnings as dividends are paid before tax. Credit union staff will be on hand to help if you get stuck with any paperwork regarding this.
Do credit unions offer fixed savings?
A few of the larger credit unions now offer accounts that are similar to bank savings accounts with advertised interest rates. These kind of accounts have the percentage and the letters AER after, which stands for Annual Equivalent Rate. You will need to check with your credit union to see if they are able to offer any competitive deals.
Do credit unions have cash ISAs?
A cash ISA is an account that you do not pay tax on with a maximum yearly savings limit of 20,000 pounds. There are some credit unions that have these kind of products and offer rates that come close to the deals that you can get from banks, but you will have to check your union to see if it offers this kind of savings account.
Will my savings be safe?
The administrators of your credit union must make sure that enough money is kept aside to make sure that they don’t go bust. Any money remaining is channelled back into the service to improve it for their members or used to pay interest on savings accounts. To keep the money safe they cannot invest in high risk finance or lend out all of their members savings. Credit unions do not have the resources available to them that are enjoyed by larger financial institutions. They have to be very responsible when they are lending to make sure that they do not over lend.
Quite a few credit unions have limits to the amount that you can save with them. These amounts can be as low as 10,000 to 15,000 pounds. Your money is protected by the Financial Services Compensation Scheme as it is with other financial institutions. In the event that your credit union went bust this scheme would pay back up to 85,000 pounds per person.
So what can we conclude regarding credit unions?
Credit unions help many people who would ordinarily have to seek financial support elsewhere that could lead them into trouble, incurring more serious debt. They are a good way to save money and help your community at the same time, but before making any financial decisions, it is always best to shop around and seek financial advice.