Credit Unions: Savings and loans from your local community

Credit Unions aren’t just an oasis for those struggling to qualify for high-street borrowing. Some of these non-profit financial savings and loan co-operatives can be best-buys for those looking to borrow smaller amounts. This is a Q&A guide on how to find them, how safe they are and when to use them.

Sadly under publicised, roughly 500 credit unions have sprung up to offer loans, savings and current accounts to their members, and roughly half a million Brits are members.

What are they for?

They’re there to provide a financial community, where its members mutually benefit… as there’s no profit for third party shareholders.

At one end they help those who can’t get access to ordinary, run-of-the-mill bank products, becoming a lifeline for many living in less well-off communities grappling with their finances. For many they’re a welcome alternative to payday loans or doorstep lending.
Yet some of the larger credit unions such as those for the police, or the big Glasgow credit union can offer products that beat those of mainstream finance. For more on their role read the factsheet by ABCUL, the credit union trade body.

What services do they offer?

The primary functions are savings and borrowing (see later, though more services may be provided depending on how big a particular credit union is).

Others services that may be available include current accounts (similar to a basic current account), a cash-based Child Trust Fund, a Cash ISA or sometimes funeral plans.

Who can join and where can I find one?

A. They’re all specific, so you need to check if there’s one that suits you in your area. 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, church or other association

Also, if one member of your family is already a member of a credit union, then other relatives living at the same address can usually join too.

Some examples of the bigger credit unions are:

   * Scotwest Credit Union: Open to anyone who lives or works in the West of Scotland. Link: Scotwest Credit Union

   * Glasgow Credit Union: For those who live or work within Glasgow or the 'G' postcode area. Link: Glasgow Credit Union

   * Leeds City Credit Union: Open to anyone who live or works in the Leeds Metropolitan area. Link: Leeds City Credit Union

   * Capital Credit Union: For those who live or work in Edinburgh, the Lothians or the Scottish Borders. Link: Capital Credit Union

   * Transport Credit Union: Major transport companies such as First Group and Virgin Trains. Link: Transport Credit Union

   * South Lanarkshire Credit Union Network: A network of seven credit unions in South Lanarkshire. Link: South Lanarkshire Credit Union Network

How to find a credit union near you?

To find a credit union near you and check out precisely what your local credit union offers, search on the ABCUL database, call Abcul on 0800 015 3060, check the ACE Credit Union Services members or look in your Yellow Pages. Your local Citizens Advice may also have contact details.

Once you’re a member you can become involved in the 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 jobs, 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’re feeling like dedicating time and effort, then you can always set up your own credit union, though this won’t be quick, it’ll usually take up to three years and there are strict procedures to follow. See the Abcul guidance for more info.

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, the're a savings and loan co-operative, which just means 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 the 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 as a ‘dividend’, 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. Plus all money in savings unions has the same government protection as bank savings accounts.

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. Though on occasion some of the bigger credit unions can be very competitive compared even to the cheapest personal loans, especially during these credit crunched times.

Yet if you’re after a 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 best listed in the Top Savings Account or Cheap Loans guides. Though it is worth bearing in mind, especially with saving, that by putting money in there, you’re actually helping others in your community.

However, where most credit unions come into their own is for loans of smaller amounts, under $3,000, or more so under $1,000. Many people who borrow these amounts would only be able to resort to doorstep lending or payday loans as an alternative, and compared to those, credit unions have halos.

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 (and I’m rather proud the MSE Charity is able to help fund some of these projects).

   * Budgeting Accounts / Bill Paying Service

You pay in a fixed amount each week or month which is used to pay agreed household bills on your behalf (for further help also see the free Budget Planner).

This’ll also allow you to benefit from the small discount offered by many suppliers for customers paying by direct debit such as Gas and Electricity.

   * Benefits Direct Accounts

You can have your benefits paid directly to the credit union, where you can withdraw any cash needed for day to day spending and have access to the standard credit union loan and saving facilities if you need them.

How do credit union loans/borrowing 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. So 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 are 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.

What are the monthly repayments on a one year loan?

There aren’t any repayment penalties

Credit union loans usually carry NO hidden charges or penalties if you can pay off the loan early. Plus life cover is packed into the loan at no extra cost so if you die before paying off the loan, the insurance 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.

How do credit union savings/bank accounts work?

A. These tend to be ultra flexible, allowing you to save amounts large or small 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 but with the addition of a debit card. You can get cash, set up direct debits and standing orders etc. but you can't get a chequebook or overdraft. There are now 18 unions that provide current accounts which are managed by the Co-operative bank.

How much do they pay?

Rather than interest like a normal savings account, credit unions aim instead to pay a dividend on your savings each year. This simply means a ‘payment back’ in proportion to the amount of money you’ve got in. Effectively if the credit union is making money, you’ll get a cut of this, and the amount depends on how much you’ve saved.

Typically, the rate is 2 or 3%, but on rare occasions it’ll be as low as 0% or as high as 8% of the sum you’ve got tucked away. The dividends are paid before tax is taken … so it’ll be up to you to pay the tax on it but your credit union will usually help you to do this.

The employment linked unions will often allow you to set up savings direct from your payroll which makes the whole process much easier.

Don’t worry if this all sounds a bit weird compared to normal interest being paid: planned legislation changes from Spring 2009 propose to give credit unions the opportunity to pay out interest instead. Any updates to this will be in the free weekly MoneySaving email.

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 savings accounts, at no extra cost. This means that if you die, the amount of 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.

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 the 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?” and 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 $50,000 per person, per institution.