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Published 21 March 2023

Credit Union Loans: How Do They Work?

If you need to borrow money, you may consider a credit union loan. You need to join a credit union to apply for a loan, but they could be more affordable than other lenders.

If you need a loan, your options extend beyond high street banks or building societies. A credit union could be a useful option, particularly if you only need to borrow a small amount of money, or if you have a less than perfect credit score.

Find out more about how credit union loans work and whether they could be an option for you.

What is a credit union?

A credit union is a community organisation which offers certain financial products, such as savings accounts and loans.

Unions are run by and exist for their members, and operate on a not-for-profit basis. Money held in savings accounts is used to fund loans for borrowers and any money made by a credit union is used to reward members or spent on improving services.

One important feature of a credit union is that members need to have something in common. For example, you may only be able to join a credit union and access its services if you live or work in a specific area, or work in a particular type of job.

Credit unions are regulated by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA).

» MORE: What is a credit union?

What loans do credit unions offer?

Credit unions can offer a range of loan products to their members, including unsecured personal loans. You will typically be able to borrow small loans of less than £100, to loans of several thousand pounds.

The amount you are eligible to borrow will depend on the individual credit union and your circumstances, typically including your income and credit score. For some loans, the amount you have in your savings could act as security and affect the amount you can borrow.

You can often take out a loan for up to five years, although this will also depend on the credit union and your situation.

Credit union loans can be used for a range of purposes, including buying a new car, consolidating debts, paying for an emergency expense, or paying for a special occasion, such as a wedding,  holiday, or Christmas.

Family loans

Some credit unions offer family loans, or child benefit loans. These are available to members who receive child benefit and have these payments paid directly into their credit union account.

If you are eligible, some credit unions will offer a family loan without needing a credit check. However, you can only borrow up to a certain amount.

The loan repayments will be taken directly from your benefits, so it’s important to bear this in mind if you do choose this option.

How do credit union loans work?

If you’re not already a member of a credit union, you will typically need to join one to apply for a loan. However, many will allow you to become a member and take out a loan on the same day.

Like other lenders, credit unions will assess your financial situation and will usually run a credit check to determine whether to offer you a loan.

There is a cap on the amount of interest that credit unions can charge on a loan. In England, Wales and Scotland, the cap is 3% a month or 42.6% per year APR (annual percentage rate). In Northern Ireland, the cap is 1% a month or 12.68% APR.

Interest is typically charged on a reducing balance. This means that, as you pay off the loan, the amount of interest you pay is recalculated on the outstanding balance. As a result, the amount of interest you pay will decrease over the term of the loan.

If you have been a member of a credit union for a while, you may be able to borrow a larger amount of money at more favourable rates compared to taking a loan as a new member. However, this will depend on the credit union, how long you have been a member, how much money you have saved with the credit union and your overall financial situation.

How to repay a credit union loan

Once you have a loan, you may be able to repay it weekly, fortnightly or monthly, depending on the provider.

You can also repay a loan in several ways, depending on the credit union:

With some loans, the credit union may require you to add to your savings at the same time as repaying your loan.

Credit unions won’t typically charge any fees if you want to pay off the loan early.

If you are struggling to repay your loan, you should contact the credit union. They may be able to work out a more affordable repayment plan or suggest other options that will help you to repay the loan.

As a last resort, if you don’t pay back your loan, your credit score may be affected and the credit union could take you to court. If you are struggling with debt, you should seek help from a debt charity.

Pros and cons of credit union loans

There are several benefits to taking out a loan from a credit union.

There are some potential disadvantages of credit union loans to consider.

How to apply for a credit union loan

To get a loan from a credit union, you need to be a member. You can use the Find Your Credit Union tool to see which ones you might be eligible to join.

You may be able to join a credit union and apply for a loan on the same day. However, for some loans, you may need to have been a member for a certain amount of time, typically 12 weeks, and built up a certain amount of savings.

When you join a credit union, you will need to provide them with some personal and financial details. The credit union may also ask for documents as proof of identity and address.

You will need to provide further information if you want to apply for a loan, such as your income.

As part of the application process, credit unions may run a hard credit check, which will appear on your credit history.Bear in mind that credit unions won’t be able to offer loans to everyone. For example, you may not be eligible if you are self-employed or you have an Individual Voluntary Arrangement (IVA), a county court judgment (CCJ) or debt relief order, for example.

Image Source: Getty Images

About the Authors

John Fitzsimons

John Fitzsimons has been writing about finance since 2007. He is the former editor of Mortgage Solutions and loveMONEY and his work has appeared in The Sunday Times, The Mirror,…

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Rhiannon Philps

Rhiannon has been writing about personal finance for over three years, specialising in energy, motoring, credit cards and lending. After graduating from the University of Cambridge with a degree in…

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