Credit union loans - how do they work?
Credit union loans can help you access finance if you've got a poor credit rating. But how do they work? And what interest rates apply? We take a look.
Key takeaways
A credit union is a not-for-profit community-based financial organisation
Credit union loans may be suitable for those with bad credit or low credit scores
Credit union loan rates are competitive, but they may not be as low as the cheapest bank loans
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, a trade union, or even living in a certain area.
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.
They work in a similar way to standard bank loans, but you can only apply for one if you’re a member of the credit union. 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. You choose the amount you want to borrow, then if you’re accepted for the loan you will pay it back over a set time period with interest.
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. They are also usually much cheaper than taking out a payday loan 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 unions often lend to those with impaired credit ratings.
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 (DWP) 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.
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’re not a member of the credit union
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 are the alternatives to credit union loans?
If you’ve been refused for a credit union loan, there are other options 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
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.
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.
