Credit unions
and other alternatives
to high-cost credit
z Need to borrow money but want to avoid high-cost credit?
z How to join a credit union
z Other sources of fair and affordable credit
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Here to help you
This guide is for you if you need access to credit but you
can’t use a mainstream lender and you don’t want to use
a payday loan or other forms of high-cost credit. When
you read it, you’ll know:
z how credit unions work and how they can help you
z how to join a credit union
z what other sources of fair and affordable credit might be available to you.
Contents
Using credit wisely 2 How to find a fair finance provider 8
Borrowing from Making sure your lender
a credit union 3 is legitimate 9
Cost of borrowing from What happens if you can’t repay
a credit union 4 your loan 10
Why choose a credit union? 5 Useful contacts 11
Finding a credit union 6 If things go wrong 12
Alternative sources
of affordable credit 7
1
Using credit wisely
If you need to borrow money, there are a few quick but important questions you
need to ask yourself before you go ahead.
Do you really need to spend this employer can give you an advance on
money now? your wages, or perhaps you can dip into
Is the thing you’re buying or want to pay any savings you have.
for on credit really essential? Could you
live without it? Would it be possible to To find out more about how to cut
put off the purchase? If you can wait back on costs and see what extra
until you can afford it, it will end up help is available, visit moneyhelper.
costing you a lot less. [Link]/cost-of-living/squeezed-
income
Borrowing money to cover essentials,
like rent, food or household bills, is a You can also look at selling some
sign you might need help getting back unwanted items around the home,
on track. Find organisations that can buying second hand, or opting for a
help you in Useful contacts on p11, or cheaper option.
visit [Link]/debt-
advice-locator If you’re on certain benefits, you might
be able to get a Budgeting Advance or
Can you afford to pay it back? Budgeting Loan.
If you do need to borrow money, work
out how much you can afford to repay To find out more about your
each week or month. Set yourself a options if you’re claiming benefits,
budget that includes realistic visit [Link]/
repayments. advance-payment
To get help with budget planning
and see if you can save on your
regular outgoings, visit Budget Planner
[Link]/managing- Use our Budget Planner to work
your-money out how you can make changes to
make your money go further.
Is there a better way of getting hold of Visit [Link]/budget-
the money? planner
If you have to borrow some money, it’s
important you look at the alternatives
to high-cost credit. Maybe your
2
Borrowing from
a credit union
What is a credit union? Credit union loans
Credit unions are community savings Credit unions have different ways
and loan cooperatives, where members of lending money. Some will lend to
pool their savings to lend to one you as soon as you become a member,
another and help to run the credit although they’ll want to make sure
union. They work a lot like banks, you have enough money after paying your
except they’re owned by and run for bills to afford the repayments on the loan.
the benefit of the members who use
Others will lend to you after you’ve
their services.
shown them you are able to save
If you have a low income or don’t regularly. This might mean saving for
have a previous record of borrowing, a few weeks before you can apply to
a credit union might be more willing to borrow from them.
help you than a high street bank or
Credit unions usually lend small
building society.
amounts for any purpose, for example
to pay for household goods, the cost of
In the UK, over 2 million people
Christmas or car repairs.
belong to a credit union.
Types of loan
Source: Bank of England, 2021
Most credit unions can lend money for
up to five years for an unsecured loan,
Who can join a credit union? and up to ten years for a secured loan.
You can join a credit union if you share a A secured loan is tied to one of your
‘common bond’ with other members, assets, usually your car or home. If you
such as: don’t repay the loan, the credit union
z living or working in the same area has the right to sell that asset to get its
money back.
z working for the same employer
An unsecured loan is not supported by
z belonging to the same trade union,
any assets.
church or other association.
Loan protection insurance
Each credit union has its own ‘common
When you borrow from a credit union,
bond’, but will usually be based on one
you might get free life insurance to
or more of the examples above.
cover the value of the loan. This means
the insurance repays the loan if you die
before paying it back in full.
3
Cost of borrowing from
a credit union
For smaller, shorter term loans, credit unions charge much lower interest rates
than doorstep lenders and payday lenders. Larger loans can be below 10% APR
(often lower than some bank interest rates).
The interest rates charged will vary
depending on the type of loan but can’t Example
be more than 3% interest per month
(equivalent to an APR of 42.6%). In If you borrowed £500 over six
Northern Ireland, the cap is 1% per months from a credit union
month (12.9% APR). charging an APR of 42.6% interest
per year, and made repayments
Check with your local credit union for on time each month, you could
its interest rates on loans. If you repay expect to pay back £93.99 per
a credit union loan early, they won’t month for six months. This would
usually charge you a penalty. cost you £563.93 in total (including
£63.93 interest).
If you borrow a similar amount from
a doorstep lender, the cost could
be substantially higher.
The APR or Annual Percentage
Rate is the interest rate plus any
fees that are included in your loan.
4
Why choose a credit union?
Credit unions can help you Other services offered by credit
manage your money unions
A credit union can help you get your Savings
finances under control. Credit unions also offer savings
They generally: accounts. Some offer a fixed rate of
interest on savings, but most will pay
z encourage people to save on a what’s known as a ‘dividend’ either
regular basis – weekly, fortnightly yearly or more frequently.
or monthly
The dividend is the way in which the
z allow you to save small amounts credit union shares its profits with its
z are willing to lend small amounts members. The amount you receive,
for short periods. if any, will vary depending on how
much profit the credit union has
Some credit unions also offer made in the year.
help with budgeting and debt
management services. Some credit unions offer Christmas
savings accounts where you have to
give notice if you want to take your
money out before November each
year. This might be a good way of saving
for Christmas as you might be less
tempted to take out your money
than you would be with an ordinary
savings account.
Other products
Alongside savings and loan accounts,
some (usually larger credit unions)
also offer:
z current accounts or pre-paid cards
z ISAs (Individual Savings Accounts)
z funeral plans
z mortgages.
5
Finding a credit union
If you’re not sure whether there is a credit union in your area, use an online search
tool or call one of the credit union associations to find out what is available locally.
Before you join - checklist
Find a credit union in your area at z Check whether you need to
[Link] be a saver before they allow you
In Northern Ireland, there are to borrow.
the Irish League of Credit Unions z Check how much they usually
and the Ulster Federation of lend and for how long. Some lend
Credit Unions. small amounts over short periods
[Link] and some will lend more over
[Link] longer periods.
z Ask for the interest rate and APR.
Some credit unions trade as
‘community banks’ or under other z Check what other services they
names not including the words ‘credit offer, for example Christmas
union’. All credit unions must have savings accounts, current accounts
the words ‘credit union’ in their or insurance.
registered name. In Wales, they may z Check how you can make your
have ‘undeb credyd’. repayments and whether it’s
For details of credit union associations, convenient for you.
see Useful contacts on page 11.
6
Alternative sources
of affordable credit
Alongside credit unions, there are other enterprises offering fair and affordable
loans to people who are unable to access mainstream credit.
Although more expensive than credit
union loans, these lenders offer credit You can find an alternative lender,
on more affordable terms than high- including CDFIs, near you at
cost credit providers such as payday [Link]. Finding
loan companies. As with all loans, Finance is run by Responsible
your repayments should be based Finance, the membership body
on an affordability assessment which for responsible lenders.
ensures you can afford to make your
loan repayments.
Some also provide money management Alternative ways of accessing
and debt advice. This might include
credit
advice on how to deal with an
unexpected life event or other change New fair finance providers are setting
in future income and expenditure. up all the time and not all of them
operate on the same model. For
Community Development example, rather than charging interest
Finance Institutions on a loan, a provider might charge a
Community Development Finance monthly membership fee in exchange
Institutions (CDFIs) are small for one or more interest-free loans a
independent organisations that offer year. It’s still a good idea to check the
loans to people who have been turned APR, which covers the fees you must
down by their bank or credit card pay as well as any interest charges.
company. They tend to be local And shop around to check it’s a good
organisations offering a personalised deal (including if you don’t want more
service and reinvest any profits they than one loan).
make back in the community.
7
How to find a fair finance
provider
Responsible Finance is the membership body for lenders who provide finance to
those not normally supported by other mainstream lenders.
All their members have agreed to: Responsible Finance provides a search
facility – Finding Finance – which helps
z offer a personal and supportive
you to find a fair and affordable loan
service, and make sure you get
provider depending on where you live
the best deal that their members
and how much you need to borrow.
offer; and
Some lenders only operate locally and
z operate as social enterprises and others cover the whole country.
re-invest profits back into the
community or organisation. Find out more at
As all lenders should, they will treat [Link]
customers fairly by being clear with you
about the costs of borrowing and only
You’ll usually be asked to show proof
lending to you if you can afford to repay
that you have been turned down for
the loan.
credit by high street lenders first.
8
Making sure your lender
is legitimate
Credit unions Choosing a lender belonging
Credit unions are regulated by the to a trade association
Financial Conduct Authority (FCA) If you’re borrowing from a credit union,
and the Prudential Regulation contacting your local credit union
Authority (PRA). This means they have association might be a good place to
to abide by certain rules and meet start. See Useful contacts on page 11.
certain standards.
CDFIs and other lenders If you’re considering borrowing
from a CDFI or another lender, use
Community Development Finance the Finding Finance service
Institutions (CDFIs) and all other provided by Responsible Finance.
organisations offering consumer credit Go to [Link]
have to be authorised by the Financial
Conduct Authority (FCA) and abide
by their rules and standards.
Check the Financial
Services Register
To check whether an organisation
has permission from the FCA to
offer you credit, you can look them
up on the Financial Services
Register. Find out more at
[Link]
If you borrow from a firm that isn’t listed
with the FCA, you won’t be covered by
the Financial Ombudsman Service if
things go wrong – see Useful Contacts
on page 11.
9
What happens if you can’t
repay your loan
If you don’t make your loan repayments, your lender can, if necessary, get back
any money you owe them:
z by using debt-collection agencies
z through the Department for Work
and Pensions (DWP) if you’re
receiving State benefits
z through the County Court if you’re
employed
z by taking security held against the
loan.
As with any money problem, the worst
thing you can do is ignore it. Contact
your lender as soon as possible. They
have to treat you fairly and work with
you to find a solution. This might involve
a repayment holiday or changing the
amount you repay each week or month.
There are organisations that can give
you free advice and suggest the best
solutions for you.
See Useful contacts on page 11 or
go to [Link]/
debt-advice-locator
10
Useful contacts
Credit union trade associations
MoneyHelper
Association of British Credit Unions
MoneyHelper is independent and (ABCUL)
set up by government to help 0161 832 3694
people make the most of their [Link]
money by giving free, impartial
Scottish League of Credit Unions
money and pensions guidance to
0141 774 5020
everyone across the UK – online
[Link]
and over the phone.
For free and impartial guidance on Irish League of Credit Unions
any money or pension queries you +353 1 614 6700
can contact us by calling on: [Link]
Money guidance Ulster Federation of Credit Unions
0800 138 3944 028 9030 1204
Mon - Fri 8am-6pm [Link]
+44 20 3733 3495
if you’re outside the UK Fair finance providers
Pensions guidance Finding Finance
0800 011 3797 [Link]
Mon - Fri 9am to 5pm
+44 20 7932 5780
For help with debt problems
if you’re outside the UK Citizens Advice
Or visit [Link] England 03444 111 444
Wales 03444 77 20 20
Webchat: Scotland 0808 800 9060
[Link]/moneychat [Link]
[Link]/ Advice NI
pensionschat 0800 915 4604
WhatsApp: [Link]/advice/debt
+44 7701 342744 StepChange Debt Charity
(money guidance) 0800 138 1111
[Link]
Join our online communities for
support: [Link]/en/ National Debtline
blog/everyday-money/come- 0808 808 4000
and-join-our-online- [Link]
communities
Money Advice Scotland
[Link]
11
If things go wrong
Complaints Compensation if a credit
If things go wrong, first contact your union fails
lender to give them the opportunity to If you have savings with a credit union
put right what you’re unhappy about. that goes out of business, you might be
They must follow a set procedure when able to get compensation from the
dealing with complaints. Financial Services Compensation
If you’re not happy with how the lender Scheme (FSCS). The amount of
has resolved your complaint or if both compensation the FSCS can pay each
parties can’t agree, you can contact the member is normally limited to £85,000.
Financial Ombudsman Service. Contact the FSCS to find out more.
Financial Ombudsman Service Financial Services Compensation
Scheme (FSCS)
0800 023 4567 or 0300 123 9123
[Link] 0800 678 1100 or 020 7741 4100
[Link]
You can also find out more
about complaints or claiming
compensation at
[Link]/money-
problems
12
Use this page to record your notes
13
Credit unions and other alternatives to high-cost
credit is one of the guides available from
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© MoneyHelper April 2023 Ref: CU_Apr23_Ed1_Eng