- explanation of a credit union
- main aims
- fees, personal loans, savings and current accounts
- credit unions and a bad credit record
Credit Union: Loans
Don’t undertake borrowing money lightly, but sometimes it is the only way to sort out a financial problem. Most people look at borrowing by applying for a personal loan from a mainstream lender. While some find it a good solution, because they can afford the repayments many people cannot and lenders turn them down from this kind of loan. This could be because they have a bad credit record or are simply not able to qualify for the amount they need.
In these instances, it can sometimes be beneficial to apply for a credit union for a low rate loan.
What Is A Credit Union?
Credit Unions originally started in the UK in the 1960s. A credit union is an organisation that is run both by and for the community. Anyone who borrows from a credit union must be a member of the organisation. The members of credit unions often have other characteristics in common. i.e. they may work for the same employer or be part of the same trade union or church community.
Credit Unions run as none profit organisations. They use any money made from loan agreements for the benefit of all the members. Members pool together their savings and lend money to other members at low personal loan interest rates
Some credit unions are large organisations with many thousands of members while others may be much smaller. The Financial Conduct Authority regulates each credit union. Credit Unions are also subject to rules concerning savings protection the same as any bank in the UK.
Each credit union will have its own rules and bonds. They all basically operate in the same way. Even if you do not live in the same area as the credit union, you can still join it if you have a link in other ways. If one member of your family is a member of a credit union, other relatives who live at the same address are usually allowed to join too.
What Do Credit Unions Do That Other Loan Organisations Do Not?
The three main aims of a credit union are to assist members with financial advice, to encourage their members to save and act responsibly with money and to be a source of low-cost loans.
Members may be unable to gain access to personal loans at reasonable rates. This is when credit unions step in and help.
Lending responsibly is also a major tenet of a credit union and each loan is assessed on the ability of the applicant to pay it back. Loans through a credit union have capped interest rates. These are 3% per month or 42.6% APR. These figures may appear to be high but the loans are usually for quite short periods of time so the total cost to pay back the loan is not extortionate.
How Does A Credit Union Work For Its Members?
Members save money through the credit union. Their money is lent out to other members in the form of a loan.
To be eligible for a personal loan, you must be a member of the credit union. You must also have accrued some savings in advance of any loan application being accepted.
An average figure for interest rates at a credit union is 1% per month. No organisation is allowed to charge more than 3% per month. There is a separate cap for Northern Ireland of just 1% per month.
Fees For Using Credit Unions
Unlike many other lenders, credit unions do not charge an arrangement fee when you take out a loan. There are no extra charges made if you find that you can repay the loan earlier than the end date of the agreement.
Included in the loan deal is built in life insurance and there is no charge for this extra benefit. This means if the worst should happen the loan will be paid off and not be passed on to your estate.
Terms For Credit Union UK Loans
The majority of credit union loans are for five years, but they can last for ten years if you put up your home as security for the loan. You can work out how much a credit union loan would cost you by going to the website of the Association of British Credit Unions (ABCUL)
A default on a credit union loan might mean that your membership is cancelled and you may be taken to court to repay the money.
If you are struggling to pay a credit union loan or other debt, you can get help from an adviser, for example, at a Citizens Advice Bureau.
Terms For Personal Loans With Credit Unions
In line with other kinds of personal loans, a contract with a credit union you must repay loans on time. The length of payments goes from a few months to 5 years although some larger organisations will offer secured loans for anything up to 10 years.
There is an Association of British Credit Unions which lists all of the organisations in the England, Scotland and Wales. Just go online and find the nearest one in your area and once you have joined, you will have access to all the benefits of this saving and borrowing.
How To Repay A Credit Union Personal Loan
Borrowing from a credit union does not require you to have a bank account. However, if you do have an account you can repay the loan through the Direct Debit system. You can also make payments in cash. Additionally, if your credit union is a work based operation, you can ask your employer to deduct the payments directly from your salary.
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The PayPoint system that operates in many UK shops can also be used to make repayments. Those people currently receiving state benefits can ask for the repayments to be deducted before you receive your monthly benefit payment.
Saving With A Credit Union
Making savings with a credit union is a pre-requisite before you can borrow. Saving this way is flexible and does not mean that you have to adhere to a set amount each month. Payments to savings can be made by direct debit or by asking an employer to make a deduction from wages.
Interest on savings in a credit union may be at a fixed rate, or you will be paid a dividend at the end of each year. The amount of dividend is dependent upon how much profit the organisation has made.
There might be just basic savings accounts on offer, or some credit unions offer ISAs and other kinds of long term savings as well.
Benefits Of Using A Credit Union
Using a credit union for unsecured loans has many features to recommend it. The organisations are run purely for the benefits of members, and there are no payouts to shareholders. Depending on how much you save each year you will receive a proportion of the profits. So, investing larger sums means getting a larger dividend. However, there is no guarantee and dividends might be nothing or very low amounts.
Credit unions do not deduct tax on interest. It is up to the individual member to declare this on the annual tax return.
Making withdrawals from a credit union savings account is simple and can usually be done in cash at the office or by transfer to your bank. Most of these kinds of savings account do not make charges, but each one is individual. Therefore, it is always best to check before you invest and become a member.
The savings protection limits imposed by the FSCS apply to all credit union savings. This means that the first £75,000 of savings is always covered.
Credit Union: Bank Accounts and Personal Loans
If you do not have a bank account, you will not be able to borrow money through a personal loan. Opening a bank account when you have had problems with money is often difficult. However, you can apply to open a current account with a credit union. This will give you all the benefits of a normal bank account. It will help to restore your creditworthiness.
Credit Union current accounts do not specify minimum limits paid in each month. This kind of account has the same benefits as basic bank accounts offered by high street banks. There is no credit check and no overdraft facility on these basic current accounts. Once the account has been running for a while, you will have access to a loan through the credit union.
There may be a small fee to operate the current account, but there are no other charges. As a way to restore order and improve a credit record, this is an excellent service offered to anyone who has financial problems. Credit unions also provide debt counselling and help with organising money. The only documentation needed for an account is proof of identity and current address.
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Credit Unions And Bad Credit
If a lender turns you down for a personal loan and refuse to tell you why, it could be because your credit record is poor. At this juncture, there is no point in applying to another lender. The lender logs your current application onto your record. Multiple applications will only make matters worse.
If this has happened, you can turn to a credit union for help. Bear in mind though; you do have to make some savings with the organisation before being granted a loan.
Joining a credit union may not be top of your list of priorities. However, if you think that you may need some help in the future, it is a good back up plan to have. You prevent yourself from more vulnerable and expensive options like door step lenders or unlicensed loan businesses.
Summary: What are Credit Unions?
In this chapter Personal Loans Now has explained what a credit union does and how it operates. There is information about opening a current account or a savings account and how loans work. Details of capped interest rates and some statistics about credit unions in the UK.