How safe is borrowing with a credit union?

By Lee Boyce
5 August 2010

I have totally lost faith in the 'big' High Street banks. I don't trust them, the customer service levels seem to be dipping and I don't want to borrow or save with them.

There is a credit union in my town and it is the first time that I have heard of one. I want to know what they do and how they work?

Also, how safe is it to both borrow from them and save with them? I'm worried that they are small, so might go bust. Mr. F. E.

Lee Boyce, from This is Money, replies: Credit unions are small non-profit organisations that are run to benefit the local community, with loans, savings, and some larger ones offering other products, such as current accounts.

They are becoming increasingly popular as customers lose faith in the so called 'bigger banks,' after the recession tarnished their reputation. There are currently over 300 dotted across the UK.

Each credit union has a 'common bond' which determines who can join it. The common bond may be for people living or working in the same area, people working for the same employer, or people who belong to the same association, such as a church or trade union.

Credit unions work by encouraging you to only borrow what you can afford to repay and save what you can. Members pool their savings to lend to other members and help run the credit union.

The cash is only used to run the services and reward members. This is unlike most other financial institutions that pay out profits to shareholders.

They are safe institutions, as those running the credit unions must prove that there is enough money in the union as to not be running the risk of going bust.

With savings accounts, the unions have the same payment protection as most financial institutions – the Financial Services Compensation Scheme will pay back £50,000 per person, so you can rest assured that anything saved up to that amount is safe.

Saving rates vary from union to union and depends on the number of members, but you can expect a return of 2-3%. Although some offer much higher rates, some offer much lower.

With loans, the benefit of a credit union is the willingness to lend small amounts, from £50, which many big name banks simply won't do.

Times are changing within the unions as well. When they started out, there was a rule that meant only those who had savings with them could borrow. Some will now lend to those who are new to the credit union.

Loans can vary with their interest rates. Some unions offer loans under 7% a year, but the typical APR tends to be around 12.7%. This may not be as low as some best buys or High Street banks, but credit unions are good for small borrowing. You would still pay this APR even on £50, which is better than payday lenders who charge typical rates of more than 2,500%.

Usually, there is no hidden penalty or charges if you can pay the loan off early and life cover is included on the loan, so if you died before paying it off, insurance would cover you.

Credit unions again can vary as to how long they will lend you the money for, so it is best to pop into your local one to find out what terms you can get. However, most will give you a personal loan for up to five years and a loan secured on your property for 10 years.