MoneySavingExpert.com on Credit Unions
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Credit unions aren’t just an oasis for those struggling to qualify for highstreet borrowing. As community co-operatives, they can also appeal to those who want to benefit their neighbours.
This Q&A guide tells you how to find a union near you, how safe they are and when to use one.
Q. What are credit unions?
A. Credit unions are small non-profit financial organisations set up by members with something in common to benefit their community.
That common factor may be living in the same town, working in the same industry (eg, the Police Credit Union) or belonging to a particular trade union.
Sadly under-publicised, roughly 500 credit unions cover the UK offering loans, savings and current accounts to their members. Almost a million Brits are members.
Q. Who are they for?
A. They’re there to provide a financial community, where its members mutually benefit as there’s no profit for third party shareholders.
This can mean helping those who can’t get access to ordinary bank products; a lifeline in less well-off communities for folks grappling with their finances. Plus, they can be a welcome alternative to payday loans or doorstep lending.
Yet, they're not just for those struggling financially. They also appeal to those who want to bank ethically and benefit their community. Some larger credit unions, such as the police union or the big Glasgow credit union, offer products that can beat mainstream finance.
Their primary functions are savings and borrowing, although other services that may be available include current accounts (similar to a Basic Bank Account), cash ISAs or sometimes funeral plans. For more on their role see the credit union trade body ABCUL.
Q. Who can join a union?
A. They’re all specific, so you need to check if there’s one that suits you in your area.
From Jan 2012 onwards, the joining rules relaxed a little, but generally, to be part of a credit union, you need to share a ‘common bond’ with other members, such as:
Live or work in the same area
Work for the same employer as other members
Belong to the same church, trade union or other association
New for 2012:
Organisations, as well as individuals, can now become members
Q. How do I find my nearest?
A. There are a few ways to find a credit union near you and check out precisely what your local credit union offers:
Search 450 unions online. Use ABCUL's Find Your Credit Union website, which does exactly what it says on the tin. You can search by postcode, employment type, or other organisations that you think may have a union.
Over the phone: If you'd prefer, you can call Abcul on 0800 015 3060.
Local searches:Other online tools include the ACE Credit Union Services, Scottish League of Credit Unions and Northern Money (which covers Northumberland, Tyne & Wear, Durham, Tees Valley and Cumbria) databases.
You can also try your Yellow Pages or ask at your local Citizens Advice bureau for contact details.
Some of the bigger credit unions are:
Once you’re a member, you can become involved in decision making and if you become interested in how it all works, you can often help run it too. You can also usually stay in the union if you're not in the bond anymore, for example if you move house or job, although the smaller unions may not have the resources to be able to deal with this.
Can’t find a credit union that fits?
If you feel like dedicating time and effort, then you can always set up your own credit union. It won't be quick, it usually takes up to three years and there are strict procedures to follow. See the ABCUL guidance for more info.
Q. How do they work?
A. Credit unions aim to help you take control of your money by encouraging you to save what you can, and borrow only what you can afford to repay.
In essence, they're savings and loan co-operatives, where the members pool their savings to lend to one another and help to run the credit union.
This is done in a ‘not-for-profit’ way, so the cash is only used to run the services and reward the members, and NOT to pay outside shareholders, like most other financial institutions.
Throughout the year, those running credit unions must put aside enough money to ensure they don’t go bust. Any money that’s left over is channelled back to those who’ve a savings account or it’s used to try and improve the overall service.
To keep all the money safe, credit unions can’t lend out all their members’ savings or plough the remainder into anything that carries too much risk. All money in savings unions has the same FSCS Government protection as bank savings accounts.
Q. What products do they offer?
A. Most credit unions don’t offer rates for larger loans, or savings that will trouble the best-buy tables. But by putting money in there, you’re actually helping others in your community.
If you’re after top paying savings, or have a reasonable Credit Rating and want to borrow cheaply; then never take out a product without first comparing it to the those in the Top Savings or Cheap Loans guides.
Products on offer include...
Loans: Most credit unions come into their own for loans of smaller amounts, under £3,000. Many people who borrow these amounts would otherwise only be able to resort to doorstep lending or payday loans as an alternative. Compared to those, credit unions have halos. You can also use the loan to buy white goods via Co-operative Electrical.
See the loans section below for more info.
Savings and bank accounts: All unions offer some form of savings account and around 25 now offer current accounts. See the savings section below for more info.
Prepaid cards:Around 40 unions around the UK offer a prepaid card service. See the Prepaid Cards guide for how the cards work.
It's not just about the products
One of the main objectives of a credit union is: "The training and education of the members in the wise use of money and in the management of their financial affairs."
While not all are able to provide a structured programme about budgeting or debt management, all are involved in helping to improve the financial literacy of their members (we're proud the MSE Charity is able to help fund some of these projects).
Projects which may be available include budgeting accounts, where you pay in a fixed amount each week or month which is used to pay agreed household bills on your behalf, or 'benefits direct accounts', where your benefits are paid directly to the credit union and you can withdraw cash needed for day-to-day spending.
Q. How do credit union loans work?
A. A key appeal of credit unions is a willingness to make small loans of £50 to £3,000, which high-street banks won’t do.
In the old days, a credit union kept a strict rule that it would only lend to those who already had savings but this is changing: some will now lend to those who are new to the organisation.
What’s the interest rate?
This is a bit of a “how long is a piece of string?” question. Sometimes loans can be under 6% a year, but the interest is usually around 12.7% APR (1% a month) going up to a maximum 26.8% APR. If you borrow £100 over a year, at most you’ll repay £126.
As noted, these rates are higher than the cheapest Credit Cards or Loans. But they're MASSIVELY cheaper than the products offered to those who are usually turned down for loans from high street banks, when rates can be 200% or more.
|Amount borrowed||Typical (APR 12.7%)||Maximum (APR 26.8%)|
There aren’t any repayment penalties
Credit union loans usually carry NO hidden charges or penalties if you can pay off the loan early. Life cover is included in the loan at no extra cost so if you die before paying off the loan, the credit union's insurer would repay the loan for you.
How long can I borrow for?
The vast majority of credit unions will give you money for a personal loan for up to five years and up to 10 years for a loan secured on your property (meaning if you can’t repay, it has a claim on your home).
However, you could find that some will be happy to lend up to 10 years for an unsecured loan, and up to 25 years for a secured one.
Like a regular bank, much also depends on YOU. You could find that some credit unions will insist you regularly save for several months first, to ensure you remain committed, or make checks to be sure that you have enough to be able to pay all your other bills as well repay a credit union loan.
As an alternative to a credit union, you may find a Community Development Finance Institution is able to help you with a small loan.
Q. How do savings/bank accounts work?
A. These tend to be ultra-flexible, allowing you to save large or small amounts weekly, monthly or whenever you can. Bigger credit unions will have branches that operate like many banks, and collection points such as local post offices; some smaller unions will have just a couple of opening hours a week.
If your union provides a bank account facility, it operates very much like a Basic Bank Account. You can get cash, set up direct debits and standing orders, but you can't get a chequebook or overdraft. Around 25 unions provide current accounts, which are managed by the Co-operative Bank.
How much do the savings accounts pay?
Until 2012, rather than interest like normal savings accounts, all credit unions paid a yearly dividend on savings. Typically, the rate is 2 or 3%, but it could be as low as 0% or as high as 8% of the sum saved.
Dividends work as a ‘payment back’ in proportion to the amount you have in. If the credit union makes money, you get a cut and the amount depends on how much you’d saved.
But as dividends are paid before tax, it is up to the individual to declare tax on any earnings, although your union will help with the paperwork.
New powers given to unions mean they are now able to offer interest on savings products. This may take a while to roll out, but it'll eventually be easier to compare the rates between your local union and other providers. Contact yours to see what it's offering. As an example, Glasgow credit union recently offered a 4% Cash ISA.
If you're with one of the employment-linked unions, you're often allowed to save direct from your payroll, which makes the whole process much easier.
How do I withdraw money?
This can be done directly at your local credit union office, by cashing a cheque at a post office, or, with some of the larger unions, with a debit card from an ordinary high street cash machine.
Any other benefits?
Life savings insurance is included with most savings accounts, at no extra cost. If you die your savings can be as much as doubled by the insurance and paid to whoever you choose. Further details on this are available from the individual credit unions.
Q. How safe are savings in a credit union?
A. Credit unions are small organisations and lack the enormous amounts of money of the big banks. On the other hand, regulations mean they must be far more prudent and not over-lend.
As with any type of savings, the most important thing to consider is “in the event it went bust, am I protected?” The answer is yes.
Credit union savings have exactly the same protection as normal savings accounts; in other words, the Financial Services Compensation Scheme will pay back £85,000 per person, per institution. For more info see the Safe Savings guide.
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