Credit union loans explained
Written by
Joe Towner
Reviewed by
Amy LancashireA credit union loan is money you borrow from a credit union: a member-owned, not-for-profit financial cooperative that provides savings and loans to its members. Credit unions are regulated by the Financial Conduct Authority and the Prudential Regulation Authority, the interest they can charge is capped by law, and your savings with them are protected by the Financial Services Compensation Scheme. For smaller loan amounts, and for people who might struggle to get affordable loans elsewhere, they can be a lower-cost alternative to banks and other lenders.
More than 2 million adults in Great Britain are members of a credit union, according to the Bank of England. Here's how their loans work, what they cost, who can get one, and how they compare with a bank loan.
What is a credit union loan?
A credit union is a financial cooperative owned by its members rather than by shareholders. Members pool their savings, and that money is used to provide loans to other members. Because credit unions are not-for-profit, any surplus is either returned to members or reinvested in the service, rather than paid out to external investors.
Most credit union loans are unsecured, meaning you don't have to put up an asset as security. They tend to be used for everyday borrowing needs, such as covering an unexpected cost, buying a car, or consolidating debt, rather than large purchases like a house.
How does a credit union loan work?
To borrow from a credit union, you usually need to become a member first. Membership is based on a "common bond", which is something members share. That's typically:
living or working in a particular area
working for a particular employer
belonging to a particular organisation, such as a trade union or church
Traditionally, you had to save with a credit union for a few months before you could borrow, and some still ask you to keep saving a small amount while you repay your loan. Many now lend to newer members without requiring savings first, so it's worth checking the rules of the credit union you're interested in.
Once you're a member and your loan is approved, you repay it in regular instalments, often through your wages, benefits or a direct debit, until it's cleared.
How much do credit union loans cost?
The biggest difference from other lenders is that the interest a credit union can charge is capped by law. In Great Britain, the maximum is 3% a month on the reducing balance, which works out at a maximum of 42.6% APR. In Northern Ireland the cap is lower, at 1% a month (around 12.68% APR).
That cap is the ceiling, not the going rate. Many credit unions charge less, and because interest is charged on the amount you still owe, it reduces as you repay. There are usually no arrangement fees or early repayment charges, so the APR is a fair reflection of the total cost.
For smaller loans and for people with a lower credit score, a credit union loan can be cheaper than a high-cost short-term loan or an overdraft. For a large loan and a strong credit history, a mainstream bank may still offer a lower rate.
Who can get a credit union loan?
To be eligible, you need to meet the common bond and become a member. Beyond that, the requirements aren’t that different to a personal loan from a bank or other lender.
Bad credit – credit unions often consider your wider circumstances rather than judging you on your credit score alone, so they can be a realistic option if you've been turned down elsewhere. See our guide to loans for people with bad credit.
On benefits – being on benefits doesn't rule you out, and some credit unions can arrange repayments directly from your benefits. There's more in our guide on borrowing while on benefits.
Self-employed or lower income – credit unions are designed to serve people who might not be well served by other lenders, including those on lower or variable incomes.
Being eligible isn't the same as being approved. Like any lender, a credit union has to check the loan is affordable for you, so it will still look at your income and outgoings.
How to apply for a credit union loan
The process is usually straightforward:
Find a credit union you can join – use the Find Your Credit Union directory to find one that covers your area, employer or community.
Become a member – open a membership account, which may involve a small deposit or saving a set amount.
Apply for your loan – online, by phone, by post or in person, depending on the credit union. You'll provide details of your income, outgoings and what you want to borrow.
Get a decision – the credit union assesses affordability and lets you know. Approval commonly takes anywhere from one to ten working days, though some offer a faster decision.
Credit union loan vs bank loan
Both are regulated ways to borrow, but they differ in a few important ways:
Cost – credit union interest is capped by law and often lower for smaller loans. Banks can offer very competitive rates on larger loans if you have a strong credit history.
Loan size – credit unions usually focus on smaller loans; banks will offer larger amounts.
Eligibility – you need to meet a credit union's common bond to join, but they can be more flexible on credit history. Banks have no membership requirement but can be stricter.
Speed – a bank or app-based loan can pay out the same day, whereas a credit union may take a little longer.
Service – credit unions are member-focused and can be more understanding if your circumstances change, but they generally have fewer branches and less advanced technology than large banks.
Pros and cons of credit union loans
Like any form of borrowing, credit union loans have trade-offs.
Pros | Cons |
|---|---|
Interest is capped by law and often lower than high-cost alternatives | You have to meet the common bond to join |
No arrangement fees or early repayment charges in most cases | You may need to save first, or keep saving while you repay |
A more understanding, member-focused approach to lending | Maximum loan amounts are often smaller than a bank's |
A more understanding, member-focused approach to lending | Decisions can take longer than an online lender |
Your savings are protected by the FSCS up to £120,000 | Fewer branches and less advanced apps than large banks |
Many include free loan protection insurance | You can still be refused if they judge that you’re unable to repay the loan |
They encourage you to save alongside borrowing |
FAQs
There are a range of financial products available that may suit your needs. We encourage you to research your options carefully and consider seeking independent financial advice before making any decisions. This blog is for informational purposes only and does not constitute financial advice.
