What is a credit union?

A credit union is a not-for-profit co-operative, providing loans and savings accounts to its members.

Their three main aims are:

  • To provide loans at low interest rates
  • To encourage regular saving
  • To provide financial support and assistance to members and the community

In 2023, the British credit union sector surpassed 1.5 million members (including junior members) for the first time. Internationally, there are 400 million credit union members.

How do credit unions work?

Credit unions are member-owned financial institutions. Meaning that when someone becomes a member, they also become a ‘shareholder’.

Members are required to save. Savings are ‘pooled’ and lent to members as loans.

Many credit unions offer ‘Save As You Borrow’ schemes where a portion of loan repayments is allocated to a savings account. These savings cannot be accessed until the loan is repaid. This provides members with a safety net to fall back on and reduces the need for future borrowing.

There are various ways members can repay their loans such as:

  • Through direct debit or standing order
  • In-person payments at the branch
  • Benefit payments such as child benefit
  • By enrolling in an employer payroll deduction scheme

As a member of a credit union, individuals have a voice and can vote on key decisions during their Annual General Meetings, where the Board of Directors and members can reflect on the year and decide on important matters. Crucially, this is based on a one member, one vote system.

Who can join a credit union?

Membership is open to anyone as long as they share a ‘common bond‘. Common bond simply means ‘sharing something in common’ and requirements are specific to each credit union. Typically they include living in a specific area, working for a particular employer, or being part of a particular organisation or community group.

How is a credit union different to a bank?

Although similar, credit unions and banks are not the same. Unlike banks, credit unions are non-profit organisations, existing to serve the financial needs of their members and local community. Importantly, credit unions promote financial inclusion. A ‘poor’ credit profile does not mean loan applications are automatically declined. This is because they assess other factors such as income and expenditure to make loan decisions on more than just your credit report.

Furthermore, credit unions do not determine interest rates solely based on credit scores, and they are subject to interest rate caps. In England, Wales and Scotland the maximum interest rate that can be charged is 3% a month (or 42.6% a year APR). The cap in Northern Ireland is 1% a month, or 12.68% a year APR.

Loan applications may be declined if the applicant is deemed high risk. This could be due to irregular income or recent missed payments. However they can also provide support to those with poor spending habits to help them budget their finances.

Applicants subject to a Debt Management Plan, Debt Relief Order, Individual Voluntary Arrangement, or a form of bankruptcy cannot apply to a credit union for a loan.

The benefits of a credit union

  • Non-profit organisations dedicated to benefiting their members and the community.
  • They are responsible and ethical lenders that provide financial education to their members.
  • Often offer better interest rates on loans, with interest rates capped by the government.
  • Encourage members to save as they borrow, ensuring they build a savings safety net.
  • Members receive a share of the profit in the form of an annual dividend.
  • Many provide free life insurance for loans and savings.
  • Savings are protected up to a total of £85,000 by the Financial Services Compensation Scheme. This is the same cover that you receive from a bank, building society or other financial institution.
  • Regulated by the Financial Conduct Authority and the Prudential Regulation Authority.

How to become a member

Begin your financial journey today with an alternative to traditional banks! Visit our dedicated platform of credit unions where you can find out whether you are eligible to join – and if so, join right there and then.