If you want a loan over a short period of time, you may be able to get a credit union loan. It will be much cheaper than going to a payday lender. By law credit unions can’t charge more than 42.6% APR for a loan, however many charge far less. What do you need to know if you’re thinking of using a credit union?
Credit union loans
Credit unions specialise in lending relatively small amounts (several hundred pounds is typical over a period of up to six months) to people who may be on a low income. Credit unions are not for profit savings and lending institutions run by and for their members.
SAVVY TIP: By law, credit unions can’t charge more than 3% interest a month, which works out at 42.6% APR. Many charge less (around 26.8% APR). Some charge less to people who have been members for several years, others to those who have saved regularly.
If you want a loan from a credit union you will have to:
- Join your local credit union. There are currently over 400 credit unions around the UK. You can find the nearest credit union to you on the Find your credit union website. You can join one that’s near where you live or your place of work or study. Some credit unions are organised around the workplace (for example the police force has a large credit union).
- Apply for the loan. You don’t necessarily have to have a bank account in order to qualify for a loan from a credit union and some credit unions offer bank accounts.
SAVVY TIP: Some credit unions insist that members start saving before they can have a loan, although the amount you have to save is normally very low (just a couple of pounds a month) others insist that you’re a member for several weeks before you’re allowed to apply for a loan, although there are those that let you join and apply for a loan at the same time.
- Have your application assessed. Credit unions will look at affordability; working out how much you can afford to borrow. They may check your credit file (it will depend on the credit union) but your credit history is not the only factor they take into account. Figures from the credit unions show that only 0.5% of loans aren’t paid back.
- Different types of loan are on offer. Although most people borrow relatively low value, short term loans, some credit unions also lend money to businesses and others lend mortgages.
SAVVY TIP: Life insurance is included in the loan (whether it’s a small or large loan) at no extra cost, except for very elderly customers, which means that if you were to die before the loan was paid off it would be cleared in full.
Paying back your credit union loan
Some credit unions offer bank accounts, which means you can pay your loan through the account, but others let you pay face to face. The options are:
- Payroll deductions. Your payments can come directly from your salary if your employer has links to the credit union.
SAVVY TIP: Some of the bigger credit unions will take payments directly from your salary, if they have links with your employer. It tends to be public sector and the social/not for profit sector employers that have signed up to this scheme.
- Payment face to face. Some credit unions are linked to Citizens Advice Bureaux in the local area and open to accept payments during the week.
– Paypoint: Some credit unions issue Paypoint cards so you can make payments in local shops. You can find your nearest Paypoint using the Paypoint locator.
- Direct payments from benefits: Some credit unions will take benefit payments, deduct the loan premium and pay you the remainder of your benefits.
Starting to save with a credit union
It may seem counter intuitive to set aside some money for savings when you’re paying back a loan, but credit unions think it’s important that people who borrow money also learn to save so that next time they need money there will be a cash fund available.
- Savings rates vary from credit union to credit union and according to the type of account you’re opening.
- You can save a small amount regularly. Credit unions are geared up to accepting regular payments of just a few pounds at a time.
- Your money is protected. Your savings are covered by the Financial Services Compensation Scheme in the same way that bank and building society savings are covered (up to a limit of £85,000).
SAVVY TIP: Although I think credit unions are a good idea, some have collapsed over the years. You will still get any money you’ve saved back, but it can be unnerving.
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