When it comes to borrowing and saving, naturally the first place many might think to go to would be a high street bank. However, there are other institutions that offer the same products that you may not be aware of such as credit unions.
Credit unions and banks both offer a variety of financial products and services, but there are some key differences between the two.
Understanding the difference between the two may help you make the best financial decision for you.
The biggest difference between credit unions and traditional banks is their ownership structure. Credit unions are owned by and run for the benefit of their members, whilst traditional banks are owned by shareholders. This means that credit unions are not profit-driven, but rather focus on providing their members with the best possible financial services and support.
Credit unions typically have more membership requirements than traditional banks. Credit unions often require their members to share a ‘common bond’ such as working or living within the local area. Whereas traditional banks often allow membership regardless of locale.
Products and Services
Credit unions and traditional banks offer a similar range of products and services, including savings accounts and loans. However, credit unions usually offer lower interest rates on loans than traditional banks. Credit union members who have saving accounts (sometimes referred to as ‘shares’) are paid annual dividends at a rate agreed by the elected board members. All members are welcome to join their credit union’s Annual General Meeting (AGM) to vote on decisions. Allowing them to have their say on decisions made.
When applying for a loan either at a credit union or a bank, all applicants have an affordability check. This check requires assessing credit score profiles.
At traditional banks, applicants will likely be rejected if their credit score and affordability is deemed too low or risky, but the applicant may not be told the exact reasons why they were rejected. At credit unions, many use innovative decision engine software that can support the credit union staff to make a more informed decision as to whether they accept an applicant. Additionally, if an applicant is declined for a loan or from affordability checks the credit union cannot lend the full amount they have requested, staff members will contact the applicant to discuss the reasons why they can provide other alternatives.
Loan Interest Rates
At traditional banks, the interest rates are determined by the Bank of England which can fluctuate. Oftentimes the loan interest rates advertised are representative and the actual interest rate is higher.
When it comes to interest rates for credit unions, in England, Scotland, and Wales interest rates are capped at 3% per month or 42.6% a year APR. In Northern Ireland the cap is 1% a month or 12.68% a year APR.
With credit unions, there are no hidden charges or early repayment fees. Additionally, the loan can also be paid in a number of different ways including directly from a member’s salary through payroll deduction or through child benefit.
Life Insurance and Loan Protection
Many credit unions offer free life insurance and loan protection on their products, giving members peace of mind. Specific requirements and eligibility will differ between credit unions.
As credit unions are owned and operated by members, profits are put back into the credit union and their community. This includes things such as donating to local charities, sponsoring community events, offering financial education programs, or creating places and spaces for the community.
Rules and Regulations
Which is right for you?
The best way choose between a credit union and a traditional bank is to compare their offerings. You should also consider your own financial needs and preferences.
If you are looking for a low-cost, community-focused banking, then a credit union may be a good choice for you.
At NestEgg, our dedicated comparison platform of credit unions can help you compare the products you may be eligible for. Sign up for early access below.