Borrowing from a credit union
Did you know that around the world, there are over 40,000 credit unions spread across 80 countries, and according to the Association of British Credit unions over 70% of people in Ireland belongs to one? But what exactly are they, and when are they useful? In this guide, we explain what credit unions are, and how it works to borrow money from one.
What are credit unions?
A credit union is an organisation that is a community run for and by the members that they have. Anyone who saves or borrows with the credit union in question must have something that links them together, for example, this may be:
- Living in the same area
- Being members of the same profession
- Members of the same trade union
- Members of the same church
- Working for the same employer
Since 2012, credit unions have been able to extend membership to those who are outside the common bond, should they want to do so. Nevertheless, it is important to note that this is simply a choice – no credit unions are obligated to do so, therefore you should always check the eligibility criteria of credit unions.
Some credit unions may just have 50 or so members, others may have thousands, but they are all run on a ‘not for profit basis’ and are regulated by both the Financial Conduct Authority and the Prudential Regulatory Authority in the UK, with any savings up to £85,000 protected by the FCA for those who have money in a credit union. The ‘not for profit’ organisation of a credit union means that profits are used to reward the members of that community, or to improve the services that they provide, instead of paying this profit to shareholders.
Money held in currents account or savings through credit unions is used to help other members borrow money in an affordable manner.
Why choose a credit union?
There are a number of reasons as to why you may choose to belong and borrow from a credit union. For example:
- Credit unions encourage their members to make regular savings payments
- They can provide loans to members at much lower interest rates that may be possible to find elsewhere. This is because their interest rates are capped. This is up to 42.6% each year APR, or 3% a month on loans, falling to 1% a month for credit unions in Northern Ireland.
- As they act in the interest of their own community members, it means that they only allow their members to borrow on the basis that they will be able to make repayments, therefore they usually take into consideration certain criteria such as their income, and how much they have already saved
- Credit unions include free life insurance. This means that if you borrow money from a union but die before being able to make full repayments it would be paid off on your behalf.
- There are no penalties for making early repayments, in a similar way to payday loans
- Credit union charges do not have hidden charges
- The duration of loans by credit unions can be flexible. Some will lender for up to 25 years (on a secured loan basis e.g against a car that you own or property), unsecured loans are typically for up to five years.
How can I borrow money through a credit union?
First things first, if you are looking to borrow money from a credit union, it is essential that you are a member of one before you try to get a loan. Depending on the union, you may need to have been with them for a certain amount of time prior to being able to borrow or to have built up a certain level of savings with the union first.
When you become a member you may need to provide identification to verify that you are who you say you are, unless you are becoming a member of your trade union.
You can find credit unions in your local area through the following links on the Association of British Credit Unions website, in Northern Ireland – Irish Federation of Credit Unions as well as the Ulster Federation of Credit Unions.
In Scotland, you can find out more by looking at the Scottish League of Credit Unions members website www.scottishcu.org.
How can I pay back a credit union loan?
One of the advantages of borrowing from a credit union is that you are able to make repayments through a number of different channels. However, it is important to note that this may vary as it will be dependent on the credit union in question.
- As a direct debit from your bank account
- You may be able to pay through your employer, having repayments deducted straight out of your pay
- Some offer the ability to pay face-to-face
- Some enable members to pay through Paypoint cards, meaning you can pay in your local shops
- Other credit unions allow you to have loan repayments deducted from benefit payments
What happens if I can’t pay back a credit union loan?
If you find yourself in a situation where you are unable to make repayments on a credit union loan, the union may decide to terminate your membership. Or, alternatively, they may try to take you to court in order to get the money back.