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Published 21 March 2023
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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:

  • by direct debit or standing order
  • in person at the credit union
  • at a PayPoint (if a credit union issues a payment card)
  • deducted from your benefit payments
  • deducted from your wages if your employer is linked to 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.

  • You can borrow small amounts:. Credit unions will offer loans for small amounts, for those occasions when you only need to borrow £100 or so. Those loans may be too small for some mainstream lenders to consider, so your only other options are likely to be payday lenders or overdrafts, both of which can be costly.
  • There is a cap on the interest they can charge: Credit unions can only charge up to 42.6% APR on their loans (or 12.68% in Northern Ireland). This means they could be a more affordable option than other lending options, such as a payday loan, especially if you don’t qualify for the best rates from other lenders.
  • Loans come with free insurance: Credit unions will provide you with a form of life insurance alongside many loans. This means that, should you pass away before you reach the end of your loan, the loan is paid off for you. In other words, your loved ones won’t be chased to pay off your outstanding debt – it is simply cleared.
  • You may be able to get a loan from a credit union even if you can’t elsewhere: If you’re struggling to get accepted for a loan from a bank or other lender, because you have a poor or limited credit history, for example, then you may be more successful with a credit union loan. 
  • You are part of your local community. By being part of a credit union, you are helping to support other people in your local area, providing additional support  to the community links offered by traditional banks or building societies.

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

  • You have to be a member: You will have to be a member of the union before you’re able to take out a loan. That’s an additional hoop to jump through ‒ you can’t just go directly to the union and apply for credit. Some unions even insist that you save with them for a certain period of time before you can borrow.
  • They may not be the cheapest: A credit union will rarely be the cheapest place to borrow, especially if you have a good credit score. Credit unions aren’t there to top the best buy tables – that isn’t their function. As a result, if you have an impeccable credit score, then it could cost you more to borrow through a union than through a regular lender.
  • There may be a limit on the amount you can borrow: Some credit unions may only offer loans based on the amount you have in your savings. This means you may not be able to borrow as much as you could from another lender.
  • Another form of finance may be more suitable: Currently, most credit unions can only offer unsecured loans. They can’t offer more specialist finance options, such as credit cards or car finance, so you may want to consider whether one of these alternatives is more appropriate for your situation.
  • You may need to pay a small fee to join a credit union: If you are not already a member of a credit union but want to join one to take out a loan, you may have to pay a joining or administration fee and deposit money into a savings account. This is usually a small sum of less than £10.
  • It could take longer to get a loan: While you may be able to get a loan on the same day that you apply from some lenders, credit unions may take longer. It could take several working days to have your application approved and to receive the funds.

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.

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