“In most cases, a credit union is created with the purpose of financially serving a specific group of people...”
Credit unions explained
Credit unions are a different type of lender to the traditional high street banks. They are co-operatives, which means members share the ownership and management of the group. In most cases, a credit union is created with the purpose of financially serving a specific group of people, such as employees in a certain profession or residents of a particular area.
Money invested in a credit union typically benefits the community it was set up to support, rather than shareholders. Members are elected by their own board of directors, so it’s generally seen as a more ethical and democratic way of lending and saving.
Credit unions seem to be growing in popularity right now, with more than 300 listed across the UK and over a million people using them. The Association of British Credit Unions also states that over 70% of Ireland’s population belong to one!
“The co-operatives pay a dividend (a portion of their earnings) to their members every year...”
How do they work?
Credit unions are classed as not-for-profit as they’re primarily concerned with serving their members rather than making a profit. Even so, they must make enough money to cover their expenses and keep running, otherwise they will not be able to continue.
The co-operatives pay a dividend (a portion of their earnings) to their members every year, rather than a traditional interest rate a bank might pay on your savings, for example. This means that any surplus money they make goes back to the people who have savings with them, rather than any shareholders. This can be a real advantage if the credit union does well that year, but the dividends can also be low – it just depends on what kind of year they’ve had. It’s important to remember that when credit unions pay dividends it is before tax has been deducted so it would be up to you to declare this to HMRC.
“It’s always best to check the rates against those of other lenders...”
What do they offer?
A credit union typically offers the same basic services as a bank, but it all depends on the size and type of credit union. For example, some offer mortgages as well as loans and savings accounts. The organisations are also known for providing very small loans, which are not commonly available from high street lenders. Because of this, they can provide borrowers with an alternative option to payday loans, as a credit union shouldn’t charge you an overly high rate of interest.
You may also find that credit unions can be more flexible than high street lenders with how much they offer to lend you. If you’re after a relatively small amount of money - £500, say – and you can repay it in a short length of time, a credit union may be able to provide you with this. Credit unions can also offer lower rates of interest on loans and higher rates of interest on savings than other financial service providers due to the fact that they want people to benefit from being members. The interest rates do vary from union to union, though, so it’s always best to check the rates against those of other lenders to be sure that you’re getting the best deal out there.
“Credit unions are covered by the Financial Services Compensation Scheme...”
Will my money be safe?
If you were to save with a credit union, your money should be as safe as it would be with a bank. Credit unions are covered by the Financial Services Compensation Scheme (FSCS), which is a government-run scheme designed to protect savers. This means that if one did go bust, the members would get their money back up to £75,000. This is enough to protect the vast majority of people.
Credit unions are also required to put enough money aside to prevent themselves going bust, and the good news is that anything that’s left over is put towards the members who are saving with them.
“There are restrictions on who can join, which are sometimes based on where you live or the job you do...”
How do I join?
If you are interested in finding a credit union near you to join, you can search online for ‘Mutual Financial Services’ in your area and see what’s available. Traditionally, credit unions want people to save with them before they lend them anything, but there are some that will lend to people even if they are not members. It’s always worth asking the credit union you’re considering.
Unfortunately, it’s not guaranteed that your application to join a credit union will be accepted. There are restrictions on who can join, which are sometimes based on where you live or the job you do.
If the idea appeals to you, follow this link to find out whether there’s a credit union you can join.