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Credit unions explained

Everything you need to know about credit union loans and savings accounts, including where to join one and what interest rates you can expect

In this article
What is a credit union? How are credit unions run? Are you eligible to use a credit union? What services do credit unions offer? Credit union savings: is my money safe? Do I earn interest on credit union savings account?
Can organisations can join a credit union? Saving with a credit union: FAQ Credit union loans: how much does it cost to borrow from a credit union? Why should I consider a credit union loan? Who are credit union loans good for? What if I die while I've got a credit union loan?

What is a credit union?

Credit unions are non-profit financial organisations, traditionally set up by members with some kind of community in common - be it where they live or their profession. But this is changing.

There are more than 500 credit unions in Britain, so almost everyone has access to one. 

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

Credit unions can now extend membership to several groups, meaning more people can be eligible to join.

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 don't live or work in Pontefract.


How are credit unions run?

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.

Are you eligible to use a credit union?

You'll need to check whether there's a credit union in your area, or if there's one for people from your profession - an easy way to do this is by searching the site Find Your Credit Union - set up by The Association of British Credit Unions Limited (Abcul).

You can also call Abcul on 0161 832 3694.

As mentioned above, some credit unions will have relaxed their eligibility criteria - but you'll need to check first. 

What services do credit unions offer?

Credit unions typically offer savings and loans, but some also branch into current accounts, mortgages and prepaid cards.

Reportedly, around 60 credit unions now offer current accounts, 40 have a prepaid card service, but very few offer mortgages.

As savings and loans are the most common services on offer, the rest of this guide focuses on how they work.

Credit union savings: is my money safe?

Yes - your savings are as safe as they would be with a bank or building society.

Credit unions are licensed deposit-takers, authorised and regulated by the Financial Conduct Authority.

Just like ordinary savings accounts, they are fully covered by the Financial Services Compensation Scheme (FSCS) up to the standard limit of £85,000 per individual.

Do I earn interest on credit union savings account?

Previously, credit unions could not pay interest on savings, only a retrospective dividend.

But, credit unions can now pay interest on savings, which means it will be easier for people to compare the rates of return with other savings providers and will help credit unions attract more savers - although most still pay a dividend. 

Contact your local credit union to find out more information about what level of dividend it has paid in recent years, or whether it offers interest on savings. 

Can organisations can join a credit union?

Under the old rules, only individuals were able to become members of credit unions. The new rules mean that organisations themselves can join a credit union (up to a maximum of 10% of the members) and use the financial services it provides. 

A community group, housing association or local employer, for example, may now be able to use a credit union to manage its money, with the added advantage that the money is kept in the community.

Saving with a credit union: FAQ

We give answers to some of the most common questions about saving with a credit union.


What happens to credit union savings when you die?


An added benefit of saving with a credit union, is that a form of life insurance is often included for free. So, if you die, your savings could be increased by this insurance - even doubled - and paid to whoever you choose.

The service varies between credit unions, so check the policy before you sign up.


Are credit union savings taxable?


Yes. Whether a credit union pays you in savings interest, or through dividends, both kinds of income are taxable - and both are treated as savings interest.

This means that what you earn goes towards your personal savings allowance - the amount you get depends on your income. 

So, even if you're paid in dividends, what you earn through a credit union won't go towards your dividend allowance.

Find out more: personal savings allowance and tax on savings interest


How do I make withdrawals from a credit union?


This depends on the organisation, so you'll have to check first. 

You can make withdrawals from some credit unions by visiting the local credit union office or cashing a cheque at the post office.

Some larger organisations make it even easier, allowing you to transfer funds online to a specified account, or withdrawing at high street cash machines.


How do I pay into a credit union savings account?


Again, the accepted payment methods will vary. You can usually pay in at your local credit union office, and sometimes at the post office. 

Some bigger credit unions will accept BACS and debit card payments.

If the credit union is linked to your employment, you might be able to save directly through your payroll.


Can I set up my own credit union?


You can - but it will take a while. It often takes up to three years to set up a credit union, and there are strict guidelines on how to do it. 

You'll need to decide what the membership criteria for joining will be, and satisfy FSA regulations to prove it will be a sustainable organisation.

If existing credit unions aren't the right fit for you, it may be worth contacting a local organisation to see if it would be willing extending its services to fit you before you decide to set up your own.

Credit union loans: 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%).

Why should I consider a credit union loan?

Credit unions offer very competitive rates of interest on personal loans of up to around £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. 

Who are credit union loans good for?

Most credit unions are happy to lend small sums, but an increasing number 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 pay it for you.