Membership of credit unions in the UK has risen to its highest ever level, with unions lending record sums as the cost of living crisis worsens, according to new research.
More than 1.92m people in the UK are now members of a credit union, analysis of Bank of England data by digital lending marketplace Freedom Finance found, with total borrowing reaching £1.78 billion at the end of 2021, surpassing the pre-pandemic peak of £1.70 billion.
Credit unions are owned and run by and for their members, and typically offer a range of financial products such as savings accounts, loans and sometimes mortgages.
Members are usually either from the same community, or work for the same industry, or belong to the same trade union, and there are currently more than 1.2m people in England, Scotland and Wales who either borrow or save through a credit union.
Here, we explain how they work, who they are for, and whether your money is protected.
How do credit unions work?
A credit union is essentially a financial co-operative which is owned and controlled by its members. Directors are also members and are voted for by other members, each of whom have one vote.
As there are no external shareholders, or investors, the focus is not on generating profits, but on providing the best service possible to members.
Credit unions can range widely in terms of size and the services they offer. Some, for example, offer apps along with online and phone banking, and may provide a local branch or service point you can walk into, whereas others may be much smaller, and may only provide a phone or online service.
Who are credit unions for?
Anyone can belong to a credit union, but they are often popular with people who might be looking for a specific size loan over a certain period of time that might not be available via high street lenders, or to those who might struggle to borrow from other lenders.
They are also popular with people looking to start the savings habit, as they may allow you to save regularly direct from payroll, if your employer has a partnership with a particular credit union.
Are credit union loan rates high?
The maximum amount credit unions can charge on loans is capped at 3% of the reducing balance, which is equivalent to an annual percentage rate (APR) of 42.6%. It’s worth seeing whether you might be able to find cheaper deals elsewhere, but a credit union loan will still be a much more cost-effective option than going for a payday loan, which charges much higher interest rates.
According to a government-commissioned study, credit unions offer the best value to consumers on loans up to £2,000, and interest rates as low as 5% or even less can sometimes be found on loans over £5,000.
Saving with a credit union
Depending on their size, credit unions may offer one or a range of savings accounts. These might include a basic savings account, notice accounts, junior savings accounts or even tax-efficient cash individual savings accounts (ISAs).
You can usually pay into these accounts in the same way you would into any other type of account, via standing order or direct debit, or by taking the cash directly to your credit union office, if it has one. Some credit unions allow you to pay in directly by payroll deduction too.
As there are no shareholders, members may receive a dividend on their savings which in some cases can be as much as 3%, according to the Association of British Credit Unions.
Can I get a current account with a credit union?
Some credit unions do offer current accounts, so you can have your wages or other income paid directly into your account, and use cash machines to take money out.
If your credit union does offer a current account, you won’t normally have to go through any credit checks to get one, as they don’t usually come with an overdraft. There also won’t be a minimum amount you need to pay in each month to qualify for the account.
Is my money safe with a credit union?
Yes, your money should be safe with a credit union, as money held with credit unions is protected by the Financial Services Compensation Scheme (FSCS).
The FSCS is the UK’s financial compensation service that steps in when financial institutions fail and are unable to pay customers’ claims. It’s worth noting that you will only be covered for £85,000 with a single institution, so if you have two accounts with the same credit union which together hold more than £85,000, you won’t get the full amount back.
Find out more about how the FSCS works in our guide Are my savings safe?
Where can I find my nearest credit union?
The Association of British Credit Unions has a useful Find Your Credit Union website which can help you search for the nearest credit union to you.
You simply enter your postcode, and if you want to, your job, your employer and any associations you belong to, and the site comes up with any credit unions that you may be eligible to join.