What is…a credit union?

CU are authorised and regulated by the Financial Conduct Authority and they offer essentially three types of financial product - current accounts, savings accounts and loans.

Current accounts: CU provide a kind of basic bank account to have your money paid directly into. They don't offer an overdraft (which can help with debt prevention) but you will get an ATM/debit card and the usual direct debit and standing order functions.

Savings accounts: these accounts are essentially ethical accounts – the money you deposit is lent to other members in your CU. Unlike many bank/building society savings accounts, you are free to save what you want, when you want. Another difference - banks are for-profit institutions meaning that their owners get a cut of the banks' interest and fee earnings, CU on the other hand are owned by their members, with the members themselves enjoying those profits in the form of lower-rate loans and higher-rate savings accounts.

Loans: as well as offering larger loans, CU can lend smaller amounts closer to the amounts lent by doorstep/payday lenders. Interest rates vary but are capped by law at 42.6% APR which is considerably less than many short-term loans and there are no penalties for early repayment. Life insurance is also built into these loans (at no extra cost to the member) so if you were to die before the loan was repaid, the balance would be paid by the insurance.

Sounds good but how do they actually work?

Quite simple really - in a CU, each member has a savings account they pay into, if another member needs to borrow money, the money for their loan is taken from the pooled savings of the other members. The profit generated from the loan fee is then invested back into member dividends.

As with everything however there are upsides and downsides...

Upsides:

• Lower rates on loans/higher interest on savings than traditional banks - all surplus is passed on to members.
• Borrowers with a poor credit rating are more likely to get a loan from a CU because they their purpose is to invest in the local community.
• You’re not a customer, you’re a member - a part-owner treated as an equal with equivalent voting rights and dividends.
• CU provide great customer service because they are small organisations where employees know their members and focus on their needs.
• CU are owned and run by the members of the community they’re designed to benefit.

Downsides:

• You must be a member to take advantage of CU benefits.
• There are limited branch locations as they only operate only in one location. Although the smaller, community-based focus is what attracts members, the lack of multiple branches could be an inconvenience for some.
• CU aren’t always as tech-savvy as big banks. Commercial banks have much larger assets and the funds to finance new technology, eg. banking apps or mobile deposits. Although they’ve come a long way in matching big bank services, not all CU can.