Skip to content

Credit union loans - how do they work?

Jonathan Leggett
Written by  Jonathan Leggett
Kim Staples
Reviewed by  Kim Staples
Updated: 21 Mar 2024

Credit union loans can help you access finance if you've got an impaired credit rating. But how do they work? And what interest rates apply? We take a look.

What is a credit union?

A credit union is a not-for-profit financial co-operative, which operates on a membership basis, and offers loans, savings and mortgages to its members. Members own the credit union entirely and take care of day-to-day operations.

In contrast to banks that prioritise profits, a credit union’s guiding principle is to provide the best service for its members and to offer a line of finance for people who might otherwise be frozen out by mainstream lenders.

Credit union members are usually united by something they’ve got in common. This might include being part of a religious group, or trade union.

Worried couple using computer

What is a credit union loan?

A credit union loan is exactly as the name suggests: a loan advanced by a not-for-profit financial co-operative.

Unlike standard bank loans, you can only get a credit union loan if you’re a member. Some credit unions also stipulate that you should start saving with them for a while, before they’ll consider you for a loan.

But other than that, loans from credit unions are quite similar to bank loans, in the respect that you're advanced money that you can typically borrow over two or five years for personal loans, or up to ten years for secured loans.

Are credit union loans cheaper than usual loans?

They’re certainly competitive. But the rates on credit union loans aren’t usually as low as the very cheapest loans from more conventional lenders.

That said, rates on a credit union loan could be better than those on offer from providers who specialise in loans for people with impaired credit ratings.

And they're pretty much guaranteed to be a better deal that payday loans, too.

Can I get a credit union loan if I have poor credit?

You might be able to, depending on your financial and personal situation. One of the key differences between a credit union and a mainstream lender is that credit unions typically pay less heed to an impaired credit rating.

This is because often part of their reason for existing is to provide finance to people who are frozen out by high-street banks and other lenders.

As a rule, credit unions tend to consider would-be borrowers’ entire personal circumstances rather than just their credit rating when deciding whether to approve a loan.

Can I get a credit union loan if I am unemployed?

Credit unions generally will lend to people who are out of work, provided you’ve got proof of a regular income, such as Universal Credit or other state-paid benefits.

Typically, this might take the form of letters from the Department of Work and Pensions or HMRC, or a Universal Credit summary letter. You’re also likely to be asked for bank statements when applying.

However, while you can get a loan from a credit union if you're unemployed, it's important to note that you’re not likely to be able to borrow as much as someone who is in regular work.

What are the alternatives to credit union loans?

If you’ve been refused for a credit union loan, there are some other avenues of credit that might be open to you. These include:

  • Asking family or friends for a loan

  • Approaching your employer for a salary advance

  • Taking out a guarantor loan

  • Asking a social fund if they’ll help with a budgeting loan

Why might a credit union reject me for a loan?

That depends on the credit union in question. But typical reasons you may be rejected for credit union loan include:

  • You’ve got a heavy gambling habit, which would impair your ability to make repayments

  • You have unsettled credit repayments defaults or County Court Judgements (CCJs) against you

  • You have an Individual Voluntary Arrangement (IVA) or you’re registered as bankrupt

How long will it take to get a credit union loan?

The timeframe it takes to approve a loan varies between credit unions. But you can generally expect to find out if you’ve been approved somewhere between one and ten days after filing your application.

What other services do credit unions provide?

Alongside loans, credit unions typically provide savings accounts and, in some rarer instances, offer mortgages too.

Credit union savings accounts differ from standard, annual-interest savings accounts by paying you an annual dividend. What you receive from your dividend depends on the credit union’s performance that year.

What’s more, unlike savings accounts from high-street banks, credit unions may require you to pay in money to your savings account every month. This is because credit unions aim to foster sound, responsible financial habits among their members.

It’s also worth noting that while you can get mortgages from some credit unions, these will generally offer less favourable rates than those from high-street banks and building societies.

What happens if I can’t repay a credit union loan?

Generally, credit unions encourage you to get in touch if you’re struggling to repay your loan and will attempt to find a way to make your repayments more manageable. That might mean replacing your existing repayment plan with one that’s more realistic.

However, that’s not to say that you won’t get a penalty or fee from your credit union for failing to make repayments. Some credit unions will charge you if you default on your loan.

Other useful guides

MoneySuperMarket is a credit broker – this means we’ll show you products offered by lenders. We never take a fee from customers for this broking service. Instead, we are usually paid a fee by the lenders – though the size of that payment doesn’t affect how we show products to customers.

Compare loans
Find a loan