A guide to credit unions

Credit unions are a way for people who share a local community, workplace or other organisation to save and borrow money.

There are over 400 credit unions in Britain; almost everyone has access to one.

Why use a credit union?

They're an alternative to the big banks...

Credit unions are financial cooperatives owned and controlled by their members. They have no outside shareholders to pay and are run by volunteers elected by the membership, from the membership.

Any profit that a credit union makes stays in the community and is used to develop the credit union and provide a return to savers.

As a credit union member, you are in control of your own finances and have a say in how your financial services provider is run.

... but with the same protection

Nevertheless, credit unions are licensed deposit takers, authorised and regulated by the Financial Services Authority and covered by the Financial Services Compensation Scheme.

They help those with poor credit

Credit unions have developed a range of financial services after listening to and understanding the needs of their members.

For all the reasons above, credit unions are particularly useful among those who may have trouble accessing credit elsewhere.

Credit unions can help people to better manage their money and avoid the potential pitfalls of payday loans.

Borrowing from a credit union

Loans from credit unions are generally cheaper than personal loans from most other providers.

Their rates are particularly good for smaller amounts, under around £4,000, but, no matter the rate, borrowers don't incur set up fees, administration costs or fees for early repayment.

'Reducing balance' rates

In addition, credit union loans offer what's known as a 'reducing balance' interest rate.

Basically that means that as soon as a payment is made, less overall interest is charged, as opposed to a traditional loan with fixed monthly payments and perhaps even fees for those that repay early.

For example, credit union members who choose to pay off a loan weekly pay less interest than someone repaying monthly.

In addition, by law credit unions can't charge more than 2% a month on the reducing balance of a loan or, to put it another way, an APR of 26.8% and many charge less.

Here's an illustration* of what that would mean in reality for a credit union member borrowing £500 and paying back over one year:

*note this is an illustration only - credit unions set their own rates.

Free life insurance

Finally, in credit unions which are members of ABCUL, life insurance is always built into the cost of the loan at no additional cost to the borrower.

This simply offers extra security: if the loan holder died before making their final repayment on the loan, the insurance would repay it rather than it becoming a debt liability of their estate.

Saving with a credit union

Easy saving is right at the foundation of credit unions, some even expect their members to be savers before they can borrow and all try to find ways to encourage members to put a little money aside.

Flexible savings

To that end credit unions aim to make it easy to save with easy access accounts that don't impose limits such as minimum savings balances and allow members to add cash to the pot as much or as little as they like.

Savings can be deposited at local branches, shops, collection points, by direct debit/standing order or taken directly from wages through payroll deduction.

As well as easy access savings accounts, however, many credit unions do offer a range of standard savings products.

Cash ISAs, Christmas savings clubs and budgeting accounts are common, for example, and they may be subject to stricter rules.

Linked to the credit union

Until recently, credit unions could pay a dividend on savings; a share of the profits at the end of the year. The law changed in January 2012 allowing some credit unions to choose to pay interest on savings instead of a dividend.

The annual dividend paid on savings depends on the union's performance over the year.

Nevertheless that doesn't necessarily mean poor rates, savers have received as much as 5% on their savings in recent years.

In addition, just as with loans, many credit union savings accounts include life insurance at no extra cost.

That means that, on the death of a member, the savings balance can be as much as doubled by the life insurance and paid out to whoever the member chooses, subject to conditions.

Joining your local credit union

To join a credit union you will need to find one that covers the area where you live or work, your employer or an organisation you belong to, such as a trade union or church.

The law has recently made this more flexible so expect to see credit unions expanding to serve new groups - including community groups and businesses - in the near future.

Finding a union you can join

• Look online: Find Your Credit Union is a national search engine for credit unions. NorthernMoney (covering the North East and Cumbria) and LondonMoney are also good for information in the areas they cover where people are likely to have access to several different credit union services.
• Call the Association of British Credit Unions (ABCUL): on 0161 832 3694 for more information.
• Ask your employer: there is a credit union for people working in the NHS, and credit unions for people employed by the police service and in the public transport industry.

Becoming a member

You will then need to contact the credit union directly to find out about becoming a member.

Once you're a member you can apply for products and, if you wish, also get involved in the running of the credit union itself.