Looking for an affordable loan without the high interest rates offered by banks and other creditors? A credit union could be the answer.
Originally set up in the 1940’s, credit unions are an alternative to banks; enabling you to borrow and save money. They sometimes provide bank accounts too and while you may not know much about them, there are actually 500 different credit unions across the UK.
So what exactly is a credit union and what are the pros and cons of using one?
What is a credit union and how does it work?
Credit unions are set up and run by its own members, rather than corporations. Known as a co-operative, they are set up by a group of people with something in common. It could be the members are all located within the same area, or it could be designed for a specific industry.
You can learn more about cooperatives on the Co-operative Group website. While the majority of credit unions are set up by members with a common bond, on January 8th 2012, the rules changed to allow unions to offer membership to those who don’t necessarily have something in common. This allowed them to be extended to new groups of people.
So if they are run by people just like you, does that mean they aren’t as reliable or safe to use as a bank? Absolutely not. Credit unions are regulated by both the Financial Conduct Authority and the Prudential Regulation Authority. This means you can be 100% certain your money is safe.
They actually run on a ‘not for profit’ basis. Profits don’t need to be paid out to shareholders. Instead the money made is used to reward its members. It’s also worth noting that they vary in size. Some credit unions have thousands of members, whereas some only have a small number of members.
They specialise in three main products including savings, current accounts and loans. Most notably they are more affordable than banks which is why they have become increasingly popular over the past few years.
The advantages of a credit union
There are many advantages of joining a credit union. The most common reason people choose to borrow or save via a credit union over traditional banks is because of the low-interest rates. Below you’ll discover more about the benefits that come from signing up with a credit union.
Better savings and borrowing rates – In January 2014, the Telegraph actually ran an article after a Cabinet Minister urged middle classes to start choosing credit unions over banks.
Within the article, it highlighted the fact that compared to the high street, credit unions offer much lower interest rates. Savings rates are also more attractive. At the time of writing, the London Mutual Credit Union offered 3% interest on instant access savings accounts.
So what about the interest rates for borrowing? Well as of April 2014, the interest rates for credit unions was increased to 3% per calendar month. This is still much lower than the interest rates offered by banks and other loan lenders.
The government stated at the time of the increase that the higher interest rates would enable credit unions to start lending to higher risk families who they previously had to turn away. More about the interest cap can be found on the gov.uk website.
However, you could always look to a Budgeting Loan which is interest-free.
The customer is always the priority – Banks generally have to answer to their shareholders. Any decisions made are often done so to benefit the shareholder, rather than the customer. This isn’t the case with credit unions. Instead, all decisions are made by the members, ensuring whatever changes are made, they will benefit the customer.
Better chance of being accepted – These days it isn’t as easy to get your hands on the cash you need as banks and other major lenders have really tightened up their borrowing criteria. If you’ve struggled to get credit elsewhere, a credit union may be able to help.
Disadvantages of credit unions
Of course, as with everything, there are some disadvantages you need to be aware of. You won’t be eligible for all credit unions so reading through the requirements of ones local to you is advised before you make an application. Below you’ll find out more about the disadvantages of being part of a credit union.
Online access to your money may be restricted – As featured on Wisebread, credit unions don’t typically have the same level of funds available as banks. Therefore, they don’t always have access to the latest technology. In fact, many offer very little in the way of an online presence. So you may struggle to gain access to your savings or current account online.
There are also fewer ATMs provided by credit unions. Many do allow you to use existing ATMs and any fees you’re charged for using them will typically be refunded. This really is something you would need to find out about before signing up; especially if you’re applying for a current account.
Savings rates aren’t always better than banks – If you’re shopping around for a savings account, a credit union isn’t always the best option. While many match and sometimes better the interest rates provided by banks, the rates are generally still quite low.
Things to consider
When making any major financial decision, it’s important to take both the advantages and disadvantages into account when deciding whether a credit union is right for you. The main thing to remember is that not all credit unions are the same. There is no ‘one size fits all’.
So when looking for one that’s right for you, always read through the small print. Be aware of any fees and charges and research as much as you can about the credit union you’re considering signing up to.
Interested in joining a credit union near you? Finding one is easy thanks to the Find Your Credit Union website. Simply fill out the short form and you’ll be presented with a list of unions you could be eligible for.
Ricky Willis is the original Skint Dad. A money-making enthusiast, father, and husband to Naomi. He is always looking for unique ways to earn a little extra.