Credit unions: what are they and how do they work?

what is a credit union

Are you considering a credit union as an alternative to a traditional bank? With their focus on community, credit unions offer enticing benefits such as lower interest rates and a commitment to member support. In this article, we’ll explore what credit unions are, how they work, and the advantages and disadvantages of joining one.

What is a Credit Union?

A credit union is a financial cooperative that provides traditional banking services like savings and loan accounts. Unlike banks, credit unions operate for the benefit of their members rather than as profit-making institutions. This community-driven approach allows individuals with a common bond, such as living in the same area or working for the same employer, to pool their savings and lend to one another. Credit unions can vary in size, from small local institutions to larger organizations, and they often enjoy tax-exempt status.

How Does a Credit Union Work?

The model for credit unions is straightforward. Members contribute their money, which is technically considered buying shares in the cooperative. This pooled money is then used to provide loans, demand deposit accounts, and other financial services for the benefit of members. Any income generated by the credit union is reinvested into projects and services that serve the community, fostering a not-for-profit ethos.

Borrowing Money from a Credit Union

To access a loan from a credit union, you must become a member. However, there are significant advantages to doing so. Credit unions typically offer savings accounts and loans as their primary banking services. What sets them apart is their commitment to not-for-profit operations, resulting in lower interest rates. In the UK, interest rates for credit union loans are capped at 3% per month or 42.6% APR. For Northern Ireland, the cap is 1% per month or 12.58% APR. Credit unions are particularly beneficial for smaller loan amounts, presenting a fairer alternative to payday loans or home credit. Additionally, credit unions may offer more flexibility to individuals with low credit scores, providing borrowing opportunities that traditional banks may not.

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Saving with a Credit Union

Credit union savings accounts offer a flexible way of saving, allowing members to save at their convenience. Whether you prefer to deposit money via a collection point, direct debit, or employer deduction, the choice is yours. As a member, you may benefit from a fixed rate of interest on your savings or receive a yearly payout, also known as a dividend. These dividends exemplify how credit unions share profits with their members. Additionally, credit union accounts often include savings and loan protection insurance.

Advantages and Disadvantages of Joining a Credit Union

Advantages

  • Lower Fees: Credit unions, operating as not-for-profit institutions, offer lower fees and charges compared to traditional banks.
  • Lower Loan Rates: Credit unions provide competitive loan rates that are capped across the UK.
  • Personalized Service: Since credit unions serve specific communities, they offer a more personal and attentive service tailored to members’ needs.
  • Community Investment: By being part of a credit union, you contribute to your community’s betterment, as the profits made are reinvested locally.

Disadvantages

  • Exclusivity: Credit unions have specific eligibility criteria based on common bonds, which may limit accessibility.
  • Limited Accessibility: Credit unions may have fewer ATMs and branches, and their technological offerings might be slightly behind those of big banks.
  • Service Restrictions: Each credit union offers different services, so you may still require traditional banking services for certain needs.

How to Join a Credit Union

To join a credit union, you can use search tools like FYCU to find one that suits your eligibility. Once you identify a credit union, contact them to confirm the information required to join and learn more about the application process. Most credit unions have websites with contact details and online application services.

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How Do I Know If I’m Eligible?

Eligibility to join a credit union is based on meeting specific criteria, known as a “common bond.” Each credit union has its own common bond, so you’ll need to research and find one that aligns with your circumstances. Financial situations do not typically restrict membership. If you’re looking to protect your money during a financial downturn, expert help can be invaluable. Visit Simple Money Tips – Steps To Financial Freedom to find the perfect financial adviser for your needs.