Credit Unions are becoming increasingly well known following on from the financial crisis of recent years as the public look to alternative forms of borrowing, given the loss of trust and confidence that many now have in the UK banking system.
It’s not just the fact that credit can be hard to find, it’s not just the fact that the big banks have tightened their lending criteria meaning more and more people, especially those on lower incomes find it hard to borrow money when they most need it, and it’s not just the fact that more and more people are intimidated by the big banks – it’s many other things too.
Credit unions have been around since the 1850s and were, rather surprisingly, first founded in Germany with their origins and ethos based on the co-operative movement.
Many were founded on the principles of self-help and responsibility paired with the tenets of democracy, equality, equity and solidarity – rather like the Three Musketeers then – all for one and one for all!
It is these early values that continue to drive the movement today along with those of openness, honesty, social responsibility and caring for others. These resonate so much that there are now some 500 separate credit unions in Britain, with the largest having approximately around 30,000 members and around £100m in cash deposits placed with them. In fact over 1 million people are said to be members with this number increasing each and every day.
So how do I become involved?
Credit unions are traditionally small, not-for profit organisations whose origins lie in and around the community in which they were formed.
You have to join and therefore become a member if you want to participate, and most credit unions will have some form of membership criteria, or common bond that links their members.
For example, members may all be located in a particular community or, in the case of the Manchester Unity Credit Union all members are also Oddfellows members.
What do they do?
Many credit unions will be there to help those people who can’t get access to ordinary bank accounts and lending products, or will position themselves as alternative to the payday lenders or doorstep loans.
But it’s not just about borrowing money, credit unions also allow members to save money with them – you don’t have to borrow money at all if you don’t want or need to!
In essence, they aim to help you take control of your money by encouraging you to save what you can and to borrow only what you can afford to repay – a form of financial education of you like!
When you join a credit union you become a member and not a customer – this is an important definition because as a member you mutually benefit from the performance of the union itself.
There are no shareholders to pay dividends to, therefore any profits made, after costs are deducted, are typically passed onto the members by way of a return on their savings.
The downside being that with many unions you won’t know what this return is until the end of their financial year, when they see how well, or otherwise, they have performed.
What if I want to borrow money?
Well, first of all you will already need to have been a member of your credit union and have a savings history with them, but if that’s the case then you may well be eligible to borrow money should you need to.
The amount you can borrow and the term you can borrow it over differs from union to union, as do the interest rates charged. However, a typical credit union may lend money from up to a few months to between five and ten years (if secured against your property), while interest rates may range from between 1% to a maximum 3% per month.
This equates to an Annual Percentage Rate (APR) of around 43% – compare that to the payday lenders where APRs of in excess of 1,000% are common and you can immediately see why you should consider a Credit Union.
How safe are they?
All Credit Unions are regulated by the Financial Services Conduct Authority which means that you have exactly the same protection as you would have if you used a UK bank.
This means that under the Financial Services Compensation Scheme your savings are protected up to a maximum of £85,000 (note this limit reduces to £75,000 on 01 January 2016).
Credit Unions really are an alternative to banks for many people – so why not check them out.
by Aiden Sawley