As the cost of living crisis continues to put immense pressure on household finances, there has never been more demand for affordable credit. It might be tempting for families to turn to high-cost credit in a bid to balance their budgets, or even illegal lenders known as loan sharks.
These methods may offer a perceived short-term relief, but they can have devastating consequences as people struggle to pay back the cash they have borrowed.
England Illegal Money Lending Team is a national trading standards body which investigates and prosecutes illegal money lenders. Recent figures released from the organisation show that nearly one in ten people turned to loan sharks to cover the costs of Christmas in 2021. In the first half of 2022, more than half of the victims did to pay for essentials such as utilities, food and fuel.
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It may be scary if you're struggling to make ends meet - particularly with the financial burden of Christmas - but there are safer options available to help. Credit unions are not for profit community lenders, providing affordable loans, and savings. Here is everything you need to know about credit unions and how they can provide financial relief at a lower cost. Information in this article has been sourced from Citizens Advice, Findyourcreditunion.co.uk and Credit Unions Wales.
What is a credit union?
A credit union is a financial co-operative which provides savings, loans and a range of services to its members. It is owned and controlled by the members and not by external shareholders or investors. Members pool their savings to provide each other with credit at a low interest rate. To be part of a credit union you have to share a common bond with other members. This can be working for a particular employer or in a particular industry, or simply living or working in a specified geographical area which could be as small as a village or as large as several local authority areas. According to Citizens Advice, this could include:
- living or working in the same area
- working for the same employer
- belonging to the same church, trade union or other association
if you live outside an area that a credit union serves there is a chance you can still join it. For example, if you're a tenant in a housing association that's linked to the credit union or you're an employee of a national company whose local workplace is linked to the credit union. You can usually join if one member of your family is already a member of a credit union, other relatives living at the same address can usually join too.
All credit unions offer savings accounts and loans. Many offer a wide choice of additional products such as junior savings accounts, Christmas savings accounts, prepaid debit cards, insurance products, cash ISAs and in some cases even mortgages.
Is a loan from a credit union right for me?
Credit unions charge low rates of interest - no more than 3% each month. This works out as 42.6% APR and means even the most expensive credit union loan in Britain is eight times cheaper than a payday loan charged at their cap. The vast majority of credit union loans are made well below the maximum interest rate
You can work out how much a credit union loan would cost you by using the loan calculator on the Association of British Credit Unions (ABCUL) website.
According to Findyourcreditunion, a Government-commissioned study in 2013 found that credit unions offer the best value to consumers on loans up to £2,000, and some credit unions will charge interest rates of 5% APR or even less for larger loans of over £5,000. If you don't repay a credit union loan, the credit union might cancel your membership and take you to court.
What if I can't pay my loan back?
The first step you should take is to contact your credit union, Citizens Advice advises. They should help you deal with your repayments. For example they might offer to:
- reduce or pause your payments for a limited time
- stop adding interest to the loan for a limited time
- help you work out a plan to pay what you owe
The credit union should allow you time to consider your options and get help with your debts and they should pause your account if you're waiting for your circumstances to improve. For example, you might be waiting for your first payment of wages or benefits. If your account is paused, it’s a good idea to use this time to get debt advice.
If your credit union offers you a new payment plan, you should think carefully about whether you can afford the monthly instalments.
How can I save with a credit union?
Credit unions encourage all their members to save. As well as a basic savings account, many can offer a range of options including Christmas savings accounts, notice accounts with higher returns, junior savers’ accounts, and even cash ISAs, according to Findyourcreditunion.
Members can pay in directly through:
- Payroll deduction or benefit direct accounts
- Retail payment networks such as PayPoint and PayZone
- By standing order or direct debit
- In cash at local offices and collection points
As the credit union’s only shareholders, a successful year for the credit union will see members receive a dividend on their savings – which could be as high as 3%. All deposits in a credit union are protected by the Financial Services Compensation Scheme up to the value of £85,000 per person. This is the same as savings in a bank or building society.
Where can I find a credit union?
You can get information about credit unions from the Association of British Credit Unions (ABCUL) website or the ACE Credit Union Services website. Credit Unions of Wales is a collaborative group of 10 credit unions working together to build the financial wellbeing of people in Wales.
You can view a list of these credit unions and their contact details here. More information about credit unions in Wales can be found on the Welsh Government website. Once you have found a credit union you can join, you will need to become a member. They typically require the same documents you would use to open a bank account.
Read more:
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- All the money being paid over Christmas to help with food and bills
