Unlike banks credit unions are cooperatives owned by their members. Their mission is therefore to provide their members with an affordable financial service; not to treat them as an opportunity to profit from. CU’s are however regulated by the Financial Conduct Authority in the same way that banks are.
CU’s operate an open, democratic management model: Members are eligible to stand for board election and directors are accountable to the members via an annual general meeting and the member’s ability to call an extra ordinary meeting if a quorum is established.
Becoming a member of a credit union
Eligibility criteria are generally set at a low level enabling easy entry. Typically this means to be a full member you must be over 16 and be party to the “common bond” of the CU. The common bond is a criterion that brings members together and may mean being part of the same demographic, employment or geographical area. A joining fee of £1-2 is usually payable which often covers the cost of the savings passbook.
Although some CU’s are able to offer a wide array of “banking services” such as ATM cash withdrawal, ISAs, basic bank accounts and even mortgages they all operate on the basis of savings and loans.
Saving with a credit union
Saving is simple, with payments in being made via cash/cheque in person at a collection point, via standing order or taken direct from salary where an employer is a “corporate member”. Access to savings is “instant” although this may involve filling out a request form and having to wait up to a week to get your money; the full balance may be withdrawn providing that there is no outstanding loan.
Money is “safe” with a CU as in the very unlikely event that the CU was to “collapse” up to £75,000 per member is covered by the government’s financial compensation scheme.
Unless a particular CU offers an ISA, interest is not paid on savings. Instead at the end of each year the board looks at the financial state of the CU and declares a dividend in much the same way that a stock market quoted plc does on its ordinary shares. In the current economy, with interest rates at all-time lows, dividends are usually significantly higher than interest earnable on bank savings accounts and vary between 1-8%, typically being 2-3%.
Borrowing money from a credit union
Even if you are unemployed CU’s offer members “value for money” loans. Often they will offer loans for relatively small amounts; £250+ (sometimes as low as £100) providing that you have been regularly saving with them for a period of time which is usually 3-6 months. The maximum loan guide in this circumstance is usually 2-3 times the amount currently saved. If you are on low income/benefits and in immediate need some CU’s may even consider you for a loan if you have not been a saver to date however the initial loan amount is likely to be relatively small.
CU’s also offer much larger loans typically up to £15,000 at rates that are competitive to banks depending on the borrower’s circumstances. Also if you are in stable employment, have a good credit history and can prove you can afford the repayments they will often lend higher amounts without a need for you to have previously saved with them.
The interest rate chargeable is limited by law to a maximum of 3% per month but are more often in the realms of 0.85-2.0% per month; further there are no loan arrangement or early repayment fees, adhoc additional payments are allowed and interest is calculated daily only being chargeable on the outstanding amount. Most CU’s will restructure payments if the client finds themselves in financial crisis while they have an outstanding loan. Furthermore life insurance is provided FOC to cover the outstanding debt should the client die during the loan period.
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