A Credit Union is a non profit organisation that is jointly managed and owned by its members. These Unions act as a place for community savings and financial cooperatives. The members pool their savings (weekly / monthly contributions) and provide affordable loans to the members of these communities.
The Credit Unions are gaining popularity very fast. The main reason is that people with poor credit history or low income are also eligible to get an affordable loan from them. The number of Credit Unions has increased to 779 with more than 814,538 members. The total amount of assets is more than £900 million. The Association of British Credit Unions Limited or the ABCUL has more than 490,000 members.
How does a Credit Union work?
‘Self-help’ is the basic principle that runs a credit union. The members of a Union pool their money in and offer financial services like loans and insurances to their members. The unions also offer yearly rewards or dividends to the members. They do not invest in share market rather put the money in bank or government bonds to keep it secured. Outside funding or investments are not encouraged.
Lately the Credit Unions have undergone a number of reforms to develop a strong and sustainable Union. Every Credit Union follows some specific norms but with the latest reforms a member of a Credit Union can obtain loan from any Unions even if he has never saved with them.
According to the Credit Union Act of 1979, all Credit Unions need to be registered under the Financial Services Authority or FSA. The FSA monitors credit Unions on a regular basis and they are audited independently.
One of the best advantages of the Credit Union is that they offer life insurance at no extra cost. Thus your savings are protected from fraud or theft. The insurance also states that your nominated beneficiary will receive up to twice the value of your savings.
How much does a Credit Union charge?
It is a rule that no credit union can charge more than 2% per month for a loan. But most of them charge a meagre 1% per month which comes to around 12.7% per annum. While the high street banks or regular lenders are quoting the lowest rates at 7.3% a year, they do not provide small loans. Credit unions can lend as little as £50 and they even do not charge any early repayment fees. Thus it can be one of the best possible solutions for people who need a small loan. The repayment terms are flexible and can be paid back within 3 months to 5 years.
How much you need to save?
As a member of a Credit Union you can save whatever you can afford regularly. It can be as small as 50 pence a week but you have to be regular. While you save, you get an annual dividend of not more than 8% on your savings. If it is a new union then it might take you a few years to earn dividends.
When can you obtain a loan?
After 12 weeks of saving you will be entitled for a loan. The amount will depend upon factors like:
- How much you need
- Ability to repay
- The policies of that Credit Union
More interestingly, if you are a credit union member, you can obtain loan from any credit union.
How to become member of a Credit Union?
To join a Credit Union you need to share a common bond with the members of a particular community. For example:
- You may live in the same area
- You have a membership of the same trade union
- You are working for the same company.
So, look for a community where you share a common bond with the members.
