20 November 2014

Credit Unions – replacing the banks for day to day saving and borrowing?

Saving and borrowing through a Credit Union not only benefits your local community, but can mean lower interest rates on loans and higher returns for savers.

Credit unions are designed to let people in a local community, workplace or other organisation save and borrow money. There are almost 450 credit unions across Britain, so pretty much everyone can join one – and the community feel they engender is in marked contrast to that many feel towards the major banks at present.

Credit unions are financial co-operatives owned and controlled by their members. They have no outside shareholders to pay (or bonuses to fund!) and are run by volunteers elected by the membership, from the membership. Profits made by a credit union stay within in the community and are ploughed back to help develop the credit union and provide a good return to savers.

As a credit union member, you are in control of your own finances and actually have a say over the way your financial services provider is run – and as membership is much smaller than say for a building society it means that individual voices count for much more. The range of financial services developed by Credit Unions is done so after consulting wither the needs of their members.

Credit unions are fully licensed deposit takers, authorised and regulated by the Financial Services Authority, and they are covered by the Financial Services Compensation Scheme.

Borrowing from a credit union

Getting a loan from a credit unions tends to be cheaper than loans from most other providers due to the lower overheads of the union. Loans are usually for smaller amounts and do not incur administration costs lending or set up fees or early redemption fees.

As an example, a typical Credit Union loan will cost 1% a month on the reducing balance of a loan (an APR of 12.7%). This means that if you borrowed £1,000 over one year, you would repay no more than £1,069 in total. Although some credit unions may charge more than this, others charge less, and by law the amount of interest charged by a credit union can be no more than 2% a month on the reducing balance of a loan (an APR of 26.8%).

That compares to a APR of 18.4% for the current (November 2014) best buy in the £1,000 – £2,999 loan market Sainsburys.

Additionally a Credit Union loan offers extra benefits. The interest is only charged on the balance outstanding. Therefore credit union members who choose to pay off a loan weekly pay less interest than someone repaying monthly. Also lump sum reductions result in a reduction in the interest payable.

When you borrow from a credit union, you can pay back loans through a wide variety of methods, ranging from a typical standing order or direct debit from your bank account, direct from your wage slip or salary, through the PayPoint network, or with cash at local offices or collection points.

There are no hidden charges and no penalties for repaying the loan early. And in marked contrast to commercial banking arrangements when dealing with an ABCUL credit unions, life insurance is built in at no cost to the borrower, so if you were to die before you repaid the loan, insurance would repay it for you.

Whilst many credit unions nowadays do not always expect members to save with them before they borrow, all new members will be encouraged to build up a savings pot as they repay their loan.

Saving with a credit union

Just as the Unions make lending easy they also make it really easy to save money with them, and allow members to save as much or as little as they like – regularly or from time to time. Deposits can be made by standing order or direct debit, through local branches, shops or even through special collection points.

Interest is paid by means of an annual dividend and often, depending on performance, this can be as much as 8% of the total amount saved.

Again life insurance is frequently included at no extra cost, enabling you to both build up a useful nest egg and on the death of a member, savings can be doubled by the insurance and paid to whoever the member chooses (subject to conditions).

As with most financial institutions Credit Unions offer a range of other savings products such as junior savings accounts, Christmas savings clubs or budgeting accounts and even Cash ISAs.

All money saved in a credit union is protected by the Financial Services Compensation Scheme, which means the first £85,000 of a member's savings are completely safe, bringing big benefits over some other forms of savings towards Christmas and the like.

How to find your local credit union

To find your local credit union you will need to find one that either covers the geographic area where you live or work or find one connected to your employer or an organisation you belong to, such as a trade union or church. Then you can contact the credit union directly to enquire about joining them.

Details of your local credit union can be found at www.findyourcreditunion.co.uk/home or call the Association of British Credit Unions (ABCUL) on 0161 832 3694.