Credit unions: An Old Solution for Modern Problems
Credit unions are evolving and becoming more popular than ever before – for the first time they offer a real alternative to payday loans.
Here’s some news to make your toes curl. British people owed a total of 1.456 trillion in the UK as of October. Unsurprisingly many of them are having difficulty maintaining payment and find themselves being forced into further problems by making ends meet with payday loans. Much has already been written about the punitive fees offered by the likes of Wonga, but there are other options in the shape of credit unions.
What are they?
If you’ve already heard of credit unions then you might think of them as being small local organisations such as a church or village. Traditionally they were run by a small group of members with cash locked in a safe ready to be disbursed in very small loans. However, since the financial crash of 2008 they have surged in popularity. People are taking this small, old fashioned idea and placing it onto an altogether larger scale. More than 1.5million people are now members of credit unions with business more than doubling in a decade.
At their most basic, a credit union is a co-operative which takes deposits and offers loans. Credit unions are set up by a group of members around a shared common interest – such as living in a local area, belonging to a church or community group. They can offer savings, low interest loans and in some instances bank accounts.
Credit Unions have three main aims:
- Encourage regular savings among members.
- Provide low interest loans to members.
- Help those in financial needs.
Unlike banks these are not for profit enterprises. Any money made will be put back into the service to make it better and improve the value it offers people. What this mean in essence is that they can offer loans at a much more affordable rate. This works even with people who might not be able to access finance through mainstream institutions. Interest rates go up to 3% per month. Compare that against payday loans which over rates of more than 1000% APR and you have and attractive offer. The cost of borrowing £400 over a period of 30 days with a payday lender could be around £100, while a credit union would cost only 8%, according to new credit union RetailCURe.
Small wonder, then, that business is good. While law makers have been taking steps to limit the interest rates charged by payday lenders credit unions are seeing business surge in the run up to Christmas. As the Mirror reported recently, credit unions had been reporting an increase of business of up to 50% as people seek out more affordable ways to save for the festive season.
Borrowing from a credit union
So, if you want to borrow from a credit union what can you do? Previously there were strict rules. Members had to share a common bond, such as living in the local area.
However in 2012 the law changed. The definition of common bond is now more relaxed. Unions will still have their own sets of rules and regulations, but they have more freedom over to whom they lend.
Interest rates range up to 3% per month, and there is plenty of variability in the rates offered. Some are as low as 1% which means you can access credit at a rate comparable to a conventional bank loan. One of these, London Capital Credit Union offers 12.7%. However this comes with a reducing balance repayment which means the rate decreases the more you pay back. So if you pay back more regularly, the overall interest rate will be much lower.
The range of loans is also growing. Traditionally, credit unions were associated with low value loans of a few hundred pounds. More and more are now operating on a larger scale with some offering borrowing enough for mortgages. For example, the ScotWest credit union is one of many who offer a range of fixed and variable rate mortgages. They can help people looking to get on the property ladder for the first time or move to another home.
Saving with a credit union
Another benefit of a credit union is that they typically encourage borrowers to save. By the time you’ve paid off a loan, you may already have built up a certain level of savings. Here is another area in which credit unions have changed.
Before, the rules stated that savers could not get interest on their money. Instead they would receive an annual dividend so you’d have to wait until the end of the year until you found out how well your money had done. The idea fed into the basic principles of community involvement underpinning credit unions. It was around the principle that the community shares in both the good and the bad times. This meant savings rates were fairly low compared with conventional accounts.
More recently the rules have changed to allow savers to secure interest. Many credit unions say that switching to this rate has enabled them to dramatically increase grow the credit union. It brings in more money and allows them to disburse more loans. Even so, progress in the UK is low. You’ll have to shop around until you find a provider which offers a reasonable rate of return.
For example, Pontypool based credit union Gateway Credit Union offers savers an attractive 1.75%. This is something which it says has helped to spark a rapid increase in business. The amount of money they brought in has doubled enabling it to offer many more loans for its consumers.
Whether you’re a saver or a borrower the landscape is becoming more favourable. Access is growing as membership rules relax and interest rates improve. The key is to shop around and exercise the choice you have. The more you do so, the better deal you’ll receive.