Credit unions: Banking without the bankers

When you borrow money, you pay a high rate of interest, especially in the current climate. And that’s because the lender’s investors want to see a profitable return.

But what if there were no fat cats at the top demanding their share? That’s the premise of credit unions, which are not-for-profit co-operatives, serving specific communities.

And they offer more than just offer savings accounts and loans; some provide funeral plans, current accounts, Christmas savings accounts, mortgages and even debt management services.

Keeping it in the community

Not all those communities catered for by credit unions are specific areas. They can be industries and even church groups. The National Fire Savers Credit Union caters for UK fire and rescue service staff and there’s a credit union specifically for black-cab drivers.

The website Find Your Credit Union will let you search by address, workplace or any associations you may belong to.

Better borrowing

Credit unions often exist to lend to lower earners who may struggle to get a loan from a high street bank. Maybe it’s a few hundred pounds to help at Christmas or to carry out some home repairs.

Normally, you pay a higher rate of interest on smaller loans, especially if you have a less-than-perfect borrowing history. But credit unions can’t charge more than 26.8% annual percentage rate and most charge less. Around 12.7% APR is fairly normal.

Check out the Association of British Credit Unions Limited for some examples of the cost, as well as a handy loan calculator.

Importantly, there are no penalties for early repayment as the union will encourage you to clear the debt as soon as you can.

[Related feature: Can social lending replace the banks?]

Banking for all

If you have a patchy credit history or you’re living on benefits, you might struggle to use mainstream banking and a credit union could help.

They will provide basic banking services and encourage you to save. In fact, one of the objectives of these organisations is to help members understand their money better.

That means you could get more support and assistance from a credit union than from a more mainstream bank.

Ethical savings

We’ve looked at community initiatives before, such as food co-operatives, and credit unions are inspired by a similar neighbourly attitude.

In fact, that’s why some people choose to save with them, as a more ethical alternative to the big banks. Your money remains within your local community or workforce and you’re helping keep borrowers away from predatory loan sharks.

But, unfortunately, you’ll usually earn less for your savings than you would at the high street banks. Of course, it still might be competitive compared to other ethical accounts.

Having said that, some credit unions offer really good returns on savings, it depends on how much they’re making. Most credit unions will pay an annual dividend to savers instead of a set interest rate.

[Related feature: Can you afford to be moral with your money?]

Is it safe?

In short, yes. Credit unions are regulated by the Financial Services Authority (FSA), just like the high street banks.

Savers in England, Scotland and Wales are protected by the Financial Services Compensation Scheme. This pays out compensation if your credit union goes bust and you lose your savings. Up to £85,000 per member is protected.

The Growth Fund

Many credit unions are being supported by the Growth Fund, a pot of money that the government has dedicated to providing lending to people on low incomes in deprived areas.

The idea isn’t to encourage poorer people to get into debt but to keep financially excluded people from turning to doorstep lenders or illegal loan sharks.

If you want to borrow money from this pot of cash, there’s a list of lenders over on the Department for Work and Pensions’ website, just enter the first half of your postcode into the search box.

Starting a credit union

If you don’t think there’s a credit union working for your particular community then you could always start one – but it’s a lot of work.

The FSA has some useful information on applying for authorisation.

Be warned, it can take up to two years for a credit union to be authorised by the FSA, so you should check that there are no existing credit unions that could help you before you start.
 
In fact, it’s often easier and faster to find an existing union nearby and see if it will expand to include your community.