Your guide to borrowing from a credit union
What is a credit union?
A credit union is a self-help co-operative whose members pool their savings to provide each other with credit at a low interest rate. To be part of a credit union you have to share a ‘common bond’ with other members. This is something you all have in common such as:
• living or working in the same area
• working for the same employer
• belonging to the same church, trade union or other association.
Each credit union has its own common bond.
Benefits of a credit union loan
Credit union loans are offered at competitive rates of interest. Borrowers can take small personal loans up to £3,000 and more and more credit unions are introducing bigger loans.
Interest is charged on the reducing balance of the loan – which means that if you want to repay your loan weekly rather than monthly, you’ll pay less interest overall.
You also have the option of paying back the loan with different methods.
You can opt to have the money go out straight from your wage packet, taken from any benefits you might receive or through the usual direct debit or cash options.
Credit union loans come with no hidden charges and no penalties for repaying the loan early.
Note that when someone takes out a loan from a credit union, they are usually encouraged to save as well, so that by the time the borrower finishes repaying the loan their savings will have grown as well.
How much does it cost to get a loan from a credit union?
A credit union loan tends to be generally cheaper than most loans from traditional lenders. The loans tend not to incur set up and administration fees or a charge when you pay it back early.
By law, the amount of interest a credit union can charge can be no more than 2% a month on the reducing balance of a loan – an APR of 26.8%. Most loans are charged at 1%.
You can work out how much a credit union loan would cost you by using the loan calculator on the Association of British Credit Unions (ABCUL) website at www.abcul.coop
Who can borrow from a credit union?
Most credit unions are happy to lend small sums, but more and more credit unions are also providing larger-sum credit for big purchases and in some cases even mortgages.
In general, credit unions will provide personal loans for up to five years and up to 10 years for a loan secured on a borrower’s property.
However, some are able to lend up to 10 years for an unsecured loan, and up to 25 years for a secured one.
Traditionally, to borrow from a credit union you had to have saved with it first. However, increasingly they are relaxing the rules are not insisting you be a member already.
What if I die before I pay off the loan?
Life insurance is built into the loans and does not cost the borrower anything, so should anything happen to you before the loan is repaid, the insurance will repay it for you.
Is it safe to save with credit unions?
Like other savings account providers, money saved with a credit union is protected under the Financial Services Compensation Scheme (FSCS) for savings up to the value of £85,000 per person, per institution.
As a general rule, credit unions tend not to loan out more money than a borrower can reasonably pay back, partly due to the fact that the unions also lack the finance to give out big loans. All borrowers are strongly encouraged to save by credit unions alongside the repayments.
How can I find my local credit union?
To get a loan from a credit union, you previously had to choose one that covered the area where you live or work, your employer or an organisation you belong to, such as a trade union or church.
Since 8 January 2012, the law has changed to allow credit unions to be more flexible about who they serve, be more flexible with their rules and expand the definition of the ‘common bond’. For example, businesses and housing association members may now be able to join.
To find a credit union near you, go to http://www.findyourcreditunion.co.uk/home
Sources: PRA unaudited figures as at 31 December 2012 and ABCUL