How Credit Unions Can Help You With Your Money

Contributed by:

Karen Bennett CBE is the CEO of Enterprise Credit Union. You can find out more here: www.enterprisecreditunion.org

The cost of living crisis is putting a lot of people under a lot of financial pressure. At times like these, it’s important to be aware of all the financial options available so everyone can make informed decisions about what is best for them and their money.

The Community Finance sector has been around for decades and is a growing area of affordable finance. They are mostly not-for-profit organisations, meaning their number one priority is to serve the best interests of their customers or members. It also means that when it comes to credit, they are able to keep interest rates and repayments as low and flexible as possible. This is hugely important, especially now that managing a family budget is harder than ever.

What is a credit union?

From credit unions that serve certain industries, employers or geographic areas, to responsible lenders operating across the UK, community finance providers share a common theme – they all have your interests as members at heart.

Credit unions are for everyone and provide financial services that mirror traditional mainstream financial services – like your big high street banks – from savings accounts, loans and in many cases, current accounts too. Even Camilla, the Queen Consort of the United Kingdom is a member of a credit union!

Why Would Someone Use A Credit Union?

When the unexpected happens, like a fridge breaking or a roof leaking, these organisations are responsible lenders who can help you without putting you under increased financial strain. It also helps people to avoid payday loans, high-cost credit and illegal lenders (AKA loan sharks).

Nearly 1.5 million people in the UK are using credit unions. Many people who use them love them because of their not-for-profit, member-owned nature. This means they put their members first and are driven by their founding purpose, which is to help people build and retain financial resilience.

How does a credit union work?

To become a member of a credit union, you need to live, work or have a connection to an area served by a credit union. This means membership is based on a common bond. If you want to become a member, the first step usually involves opening a savings account and depositing a small amount of money into it. This can be done online, which is also where you can check the approval criteria to ensure you’re eligible to join.

Find Your Credit Union can help you find a credit union you’re able to join.

 It’s also important to note that different credit unions provide different services, so it’s good to check that the credit union you apply to can provide you with what you need.

What can a credit union do?

Traditionally, credit unions have been more focused on providing savings and loan services, but over time there has been a significant increase in the range of products available. Their accounts are flexible, and enable people to save what they can, when they can.

Financial Support and benefit checking

Credit unions may be able to support people who struggle to access traditional financial services due to having a poor or limited credit history. They offer products and services to people at much better rates than payday loan lenders, and have a responsible approach when they do, making sure that the individual can repay the money they borrowed without getting into financial trouble. They will often be able to point you in the direction of other financial support too. Many will have integrated benefits calculators that regularly help people to identify hundreds of pounds in unclaimed benefits each month. Many people in work are surprised to find out they’re missing out on what they’re entitled to – meaning they potentially don’t have to take out the loan they thought they needed.

Dividend Income

As mentioned above, credit unions are for everyone, so people with good credit benefit too. When saving with a credit union, most give out a yearly pay-out in the form of a ‘dividend’. It’s the way that credit unions share their profits with their members and the amount depends on how the business has performed over the year. The more you save, the larger your share of the yearly dividend pay-out will normally be. Lots of members value the fact that people save together and from those pooled savings are able to lend to each other all year round.

Loans

Loans can start from as little as £50 and are administered so that borrowers save at the same time as repaying the loan. This means you start to build your own savings pot whilst borrowing.

Credit unions will check if a loan is right for you. They too have your eligibility checked when you apply because they want to make sure you can afford repayments without putting you under financial strain. Interestingly, in England, Scotland and Wales, there’s a cap on the amount of interest that credit unions can charge on their loans, set at 3% a month or 42.6% a year APR.

They will be as open-minded, fair and transparent as they can be and may be able to help even if you have been turned down by other mainstream providers. One of the other benefits is that their teams will help you if you run into trouble with repayments and will be as flexible as possible to help you get back on track.

If you find yourself in debt from multiple providers, you may be able to take out a ‘consolidation loan’ from a credit union, by restructuring your existing debts into a single, more affordable loans.

‘Green’ Loans

Some credit unions also offer ‘green loans’ for people to make their homes more energy efficient, for example, fitting new windows or doors or getting a new boiler installed.  Green loans can also help with other environmental purchases including electric bikes and scooters, electric cars and the installation of car charging points.

Responsible lenders are another option to consider and are described by their customers as a lifeline. They’re members of Responsible Finance, and include the likes of Scotcash, Moneyline, Fair for You and Fair Finance. Most of them fall into the non-for-profit category too, meaning they’ll reinvest any surplus in order to keep interest rates and repayments as low and as flexible as possible for their customers.

What are the pros and cons of Credit Unions?

Pros:

    • They are non-for-profit and so work to benefit their members.
    • Interest rates on loans are capped in England, Scotland and Wales so they are often the more affordable borrowing option in comparison to other lenders.
    • Often, free insurance comes with loans and savings accounts from Credit Unions.
    • Credit unions are likely to be able to provide tailored advice and specific tools to help you manage a budget and your money.
    • Their simplicity and social purpose are big positives.
    • Credit unions are renowned for having attentive customer service, often providing useful signposting to relevant products and services – and many are now making services available online or via an app.
    • Like all regulated banks and building societies in the UK, credit unions are fully supervised and regulated by Prudential Regulatory Authority and the Financial Conduct Authority. Savings are protected by the Financial Services Compensation Scheme.

Cons

  • They don’t offer as wide of an array of products and services as banks do.
  • Members of credit unions have something in common, such as the same employer, trade union, place of worship or living in the same area. So you will be limited in which ones you can join. If there isn’t a credit union which is right for you, you might want to find out more about other responsible lenders, through findingfinance.org.uk
  • Some credit unions do charge a small joining or administration fee.

What Are Payroll Schemes?

Employers can form partnerships with credit unions. The partnerships enable staff to become members and access their services. Through these partnerships, employers can set-up a process whereby an employee’s chosen sum of money is directed from their salary to their credit union savings account every month. Just like how pensions work. They also permit people to borrow and make repayments from their salary.

Referred to as the ‘payroll schemes’, people can save from £15 up to £1,500 per month, and it’s not all about how much you save, it’s that you do save, and regularly.

Lack of a financial buffer has been shown to compound mental health issues, reduce quality of life, and negatively impact personal relationships and productivity in the workplace. With payroll schemes, the power is in the hands of the people, empowering them to improve their money management and see an improvement in quality of life and confidence levels.

In a survey of 1,600 Leeds City Council and NHS York workers using a Leeds Credit Union payroll scheme, 96% recommended a payroll savings scheme to their co-workers and 79% found the simplicity of saving in this way to be the biggest draw.

These schemes work with what is known as the ‘set and forget’ method. This means that people can choose a regular amount to save, which is paid into their credit union account direct from their wages. Before they know it, they’ve built up savings to help with their personal goals, or a handy fund to help them cope with a ‘rainy day’. Research has shown that saving in this way helps people form good savings habits while simultaneously increasing financial resilience, protecting them from financial shocks, like unexpected health issues or home repairs.

How Do Credit Unions Make Money?

Credit unions make money through interest, fees and loans as described above. The main difference though is that credit unions generally make less money than banks because credit unions tend to charge lower interest rates and offer their members more perks. There is a cap on how much interest they can charge too.

Final Thoughts – Is It Good or Bad to be part of a credit union?

Credit unions can help wth an array of financial support services that can help you to manage your money better. They are a viable alternative to traditional banking, and are worth looking into to keep all of your options open. They may not be able to do everything that your bank does though, so it might not suit everyone, so go into it with your eyes open and make sure you understand what you’re signing up for.

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