How do Credit Unions work?
How do Credit Unions work?
Have you ever thought about joining a credit union but wondered how they work? If you have, you may want to know that credit unions can be a good option, when it comes to improving your financial situation. They use a principle of community saving and borrowing.
The members of the Union put their savings together. Members can then apply to borrow from this pool of money. The interest rates for this lending are a maximum of 3% per month (42.6% APR) in England, Wales and Scotland. The interest rates in Northern Ireland are a maximum of 1% per month (12.9% APR). As you can see, this makes credit union borrowing more affordable than many other options.
Facts about credit unions
If you are thinking of joining a credit union, you should know that they offer savings and loan accounts as a minimum. There are some other facts that it’s useful to know before joining.
- There is always a bond between members of a credit union. This bond can be anything from living in the same neighbourhood to having the same occupation.
- Credit unions are not-for-profit organisations. This means that they use any profit they make to improve the services they offer and help members.
- Credit unions come in all different sizes. Larger credit unions often provide more diverse financial services.
The Prudential Regulatory Authority and the Financial Conduct Authority regulate the activities of credit unions.
Why go to a credit union?
There are several reasons why it makes sense to approach a credit union.
- They aim to provide loans at low rates of interest.
- Credit unions provide financial advice and help, to encourage members to have good saving habits.
- They are responsible when assessing members’ ability to borrow and repay.
Given these facts, credit unions can be a good option for people who need financial support.
The process of borrowing through a credit union
You cannot borrow money through a credit union without becoming a member first. You may also need to build up some savings with the credit union before you can borrow.
With this in mind you should start the process as soon as possible.
Find a credit union
The first step is to find a credit union that is willing to accept you as a member. In order to become a member you may need to provide identification.
Understand the rules
There are some basics that apply to all credit unions, such as the cap on interest rates. All credit unions also provide life insurance free of charge so the loan clears if you die. However, there are some features which differ between credit unions. This is why you need to understand the rules of the credit union you are joining. You also need to understand the services that are available.
In most cases, credit unions offer unsecured loans of up to 5 years and secured loans of up to 10 years. However, it is possible to find credit unions which provide loans over 25 years. it’s possible to repay loans in many different ways including:
- Directly from wages.
- By face-to-face collection.
- Directly from benefits.
- By PayPoint at the local shop.
If you join a credit union you should ask what repayment options are available.
If you need help with your finances, joining a credit union can be a good option. However, it is not an easy means of borrowing. Credit union loans are the same as all other loans, in that you have to adhere to repayment terms. You will also have to prove that you are financially viable in order to receive a loan in the first place.
Joining a credit union is a way of stabilising your finances. Becoming a member is not just about trying to borrow money it’s about trying to save. It’s also about becoming more financially aware and responsible. This happens by members having access to financial advice and support.
If your sole aim is to get a loan then joining a credit union may not be the best idea for you. This is because the main function of a credit union is not to be a lender. It’s main function is to be supportive and promote financial wellbeing. Many credit unions require members to build savings before they can borrow. If this type of financial responsibility appeals to you then you should find a reputable credit union you can join.
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If you are considering a loan please make sure you can afford to repay it back in time. Late repayments can cause you serious money problems. For help please go to moneyadviceservice.org.uk