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Borrowing from a credit union

By Rob Goodman

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Borrowing from a credit union

Find out all you need to know about borrowing from a credit union.

Credit unions - what are they?

Credit unions let people in a local community or other organisation save and borrow money. There are over 500 credit unions in Britain, so almost everyone has access to one. There are also work-related credit unions – for example, for employees of the NHS, trade union members and employees in the passenger transport industry.

Until 8 January 2012, credit unions were hampered by restrictions that meant all of their members had to have a common bond – such as living in the same geographical area or working for the same employer.

Credit unions no longer need to prove that all the eligible members have something in common, which means that credit union services can be extended to new groups much more easily. 

For instance, a credit union providing services to anyone living or working in Pontefract will now be able to serve all the employees of a company too, even if they do not live or work in Pontefract.

How credit unions work

Credit unions are owned and controlled by their members, so they have no outside shareholders to pay. They are run by volunteers elected by the membership. Any profit that a credit union makes is used to develop the credit union and provide a return to savers.

How much does it cost to borrow from a credit union?

Loans from credit unions are generally cheaper than loans from most other providers for smaller amounts and do not incur set-up fees, administration costs or early-redemption fees.

Many credit union loans, for example, will cost 1% a month on the reducing balance of a loan (an APR of 12.7%). This means that if you borrowed £1,000 repaid over one year, you would repay £1,067 in total.

Some credit unions may charge more than this although, by law, the amount of interest charged by a credit union can be no more than 3% a month on the reducing balance of a loan (an APR of 42.6%).

Benefits of a credit union loan

  • Credit unions offer very competitive rates of interest on personal loans of up to about £3,000 and are happy to offer much smaller amounts.
  • Interest is charged on the reducing balance of the loan. This is important if you want to repay your loan weekly rather than monthly, as you'll pay less interest overall.
  • When you borrow from a credit union, you can pay back loans through various channels. These include straight from your wages through payroll deduction, from your benefits if you pay them into the credit union through the PayPoint network, from your bank account by direct debit, or with cash at local offices or collection points.
  • Credit union loans come with no hidden charges and no penalties for repaying the loan early.
  • When someone borrows from a credit union, they are encouraged to save too, meaning that by the time they finish repaying the loan, their savings will have grown as well. The Which? Money Compare tables let you search hundreds of savings accounts and cash Isa deals from providers large and small so that you can find a good home for your nest egg.

Who are credit union loans good for?

Most credit unions are happy to lend small sums, but more and more are also providing larger-sum credit for big purchases and, in some cases, even mortgages.

In general, credit unions will provide personal loans for up to five years and up to 10 years for a loan secured on a borrower’s property. However, some are able to lend up to 10 years for an unsecured loan and up to 25 years for a secured one.

Traditionally, to borrow from a credit union you had to have saved with it first. These days, however, many credit unions do not insist on this.

What if I die while I've got a credit union loan?

Life insurance is built into credit union loans at no extra cost to the borrower, so if you were to die before the loan is repaid, the insurance would repay it for you. 

How can I find my local credit union?

To get a loan from a credit union, you previously had to choose one that covered the area where you live or work, your employer or an organisation you belong to, such as a trade union or church. 

Since 8 January 2012, the law has changed to allow credit unions to be more flexible about who they serve: credit unions still have membership restrictions, but now have the power to change their rules and expand the definition of the 'common bond'. For example, businesses and housing association members may now be able to join.

To find your local credit union visit www.findyourcreditunion.co.uk or call the Association of British Credit Unions (Abcul) on 0161 832 3694.

  • Last Updated: July 2016
  • Updated by: Rob Goodman

Which? Limited (registered in England and Wales number 00677665) is an Introducer Appointed Representative of Which? Financial Services Limited (registered in England and Wales number 07239342). Which? Financial Services Limited is authorised and regulated by the Financial Conduct Authority (FRN 527029). Which? Mortgage Advisers and Which? Money Compare are trading names of Which? Financial Services Limited. Registered office: 2 Marylebone Road, London NW1 4DF.