The standard means of obtaining credit has become so widespread that being at the mercy of increasing interest rates and inflated charges on loans and credit cards has become so commonplace that it is easy to believe there is no other option. But there may be an alternative in the form of the little known credit union movement.
A credit union is a profit sharing, financial co-operative run democratically by the members of the union itself. And by offering a more financially attractive alternative to the standard products offered by banks, the popularity of the credit union movement in the UK is increasing.
As maximizing profits is not the key goal for a credit union, such an organisation has three main aims:
· To encourage its members to save regularly
· To provide loans and financial assistance to its members at the lowest rates of interest possible
· To offer its members help and support, if required, in the management of their financial affairs
To enable you to take advantage of the kind of services that a credit union offers, all you have to do is become a member. Not that this is quite as straightforward as you might imagine…
The key to becoming a member of a credit union is what is known as the ‘common bond’. The common bond determines whether or not you will be accepted as a member of a credit union and this could be that you reside in a specified area, work for a particular employer or within a particular trade, or that you are a member of a certain club or association.
Because of this, credit unions welcome everybody from within the common bond regardless of income, employment status or age and also – and perhaps more crucially, regardless of your credit rating or if you are unable to save a regular amount. So whether you have a poor credit rating or not you can still become a member of a credit union and save as little or as much as you like.
Irregular savers are just as welcome as those people who are able to save money on a regular basis and usually all members, regardless of the amount saved, are paid the same percentage annual dividend on their savings. Whilst generally paid at 2 to 3%, this can be as much as 8% depending on profits.
Using the sum of all members’ savings, the credit union is then able to provide low cost financial services to its members. Although each credit union (as all mutual societies) must ensure that enough money is set aside to ensure financial stability, all other profits are used to provide the lowest interest rates for members’ loans whilst returning an attractive rate of interest for its savers.
With an attractive 6% being the typical interest rate on loan repayments (which normally includes insurance at no direct cost), as the rate of interest that a credit union can charge is capped at 1% a month the most interest you would have to pay on a loan of £100 for example would be only £1 a month!
Insofar as government regulation is concerned, the Credit Unions Act 1979 remains the key legislation that regulates the activities of credit unions. As well as setting out the objectives of an individual credit union, it also mandates that all accounts are independently audited on an annual basis and that full insurance is put in place against fraud and theft.
Also, a given credit union cannot lend all the money saved as loans to its members and cannot invest any residual money in any ventures above a certain level of risk. To reduce the risk of bad investment and to ensure that all savers’ money is not tied up for long periods of time, any money in the control of the credit union must be put into bank deposit accounts, government bonds or other reliable investments.
Overall, credit unions offer an easy and convenient way to save and borrow and can provide a focal point for a community by bringing people together, to both help each other and to help the community as a whole. A credit union can also help to revive the economy of a local area as more money stays within the community which has a knock on effect on income for local businesses.
All you have to do is prove that you can save before any loan will be offered but once proven, financial assistance will be offered based on how much you can save or tailored to your individual circumstances. Paying into a credit union is also easy and can be done at local shops, convenient collection points, or can even be taken directly from your salary.
So is becoming a member of a credit union right for everyone? Before considering them it is worthwhile bearing the following points in mind:
· Regardless of which credit union offers you the best option, you cannot simply join whichever credit union you want. You have to fulfill the requirements of the common bond or at the very least, be a close family relation of someone that does and who is already a member.
· Credit unions are not just a means of obtaining cheaper loans. Although there is no fixed rule for all credit unions, generally you have to have saved with them before any assistance is offered and proved yourself to be able to save.
· A credit union does not provide the convenience of the high street banks as an individual union will typically have very few or sometimes no ATMs and few branch offices.
· Credit unions may not offer the range of services that you can get from your local bank so check to see what is on offer before you commit. Other services such as the return of cancelled checks etc. may also not be provided. It may be worth retaining an account at your bank alongside credit union membership.
· All money borrowed from or saved with a credit union must be in the name of a member and as such, no money can be borrowed in the name of your business. Even if you need money for your business you still need to borrow money in the manner of a standard member of the credit union.
If you above points do not preclude you from becoming a member of a credit union then the best way to obtain a list of the credit unions operating in your local area would be from the Citizens Advice Bureau or your local council. Alternatively there may be a credit union covering the particular industry/place of employment where you or your partner work so it may be worthwhile contacting your payroll department or trade union representative.
Although relatively small in size due to legal restrictions in place to prevent unfair competition with banks and other financial institutions, the UK credit union movement is growing in popularity and offers a real alternative to expensive bank loans or credit cards. Even if your credit rating is poor or non-existent, a credit union may be the right option for you.
