Could a credit union help you?
Cash-strapped families are turning to new ways of operating their finances in a bid to avoid being caught up in high borrowing costs: Enter the credit union.
As of March this year, almost 900,000 adults used credit unions for their financial needs, up from about 700,000 at the end of 2009, according to figures from the Association of British Credit Unions (ABCUL).
But why has popularity soared? In order to answer this question, it's first necessary to understand what a credit union is and how it works.
How credit unions help borrowers
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Unlike banks, credit unions are not-for-profit financial cooperatives that encourage people within local communities to exchange money ethically and at sustainable levels of interest.
The primary real draw of credit unions is that they help people on low incomes and/or who have poor or non-existent credit scores to qualify for affordable borrowing.
This means these people – who are already strapped for cash – can side-step subprime lending sources such as payday loan companies and doorstep lenders which could only make matters worse.
The need to borrow at sustainable interest rates becomes even more important over Christmas – and this year, some credit unions are getting ahead of the game.
Nottingham Credit Union, for example, is set to open a 'pop-up shop' on Mansfield's Regent Street in mid-October to make it clearer to local residents that they don't need to pay between 10 or even 100 times more in interest for borrowing to tide them over the Christmas period.
Nottingham Credit Union's figures show that someone borrowing £500 through a typical payday lender would pay back a total of £645 – as long as he or she repaid the loan within 28 days.
Someone borrowing the same amount from a doorstep lender, meanwhile, would pay back a total of £910, made up of 52 weekly payments of £17.50.
With the Nottingham Credit Union, on the other hand, the same person would pay back just £563.53 in total – or £10.84 a week for 52 weeks.
That's based on an APR (annual percentage rate) of just 26.8%, compared to a massive interest rate of 272.2% when borrowing via a doorstep lender, and would save the borrower more than £346.
But how are these cheap loans funded? The answer is simply by money paid into credit union savings accounts (some £762million nationally at the latest count) by members of the community that are, looking to find an alternative home for their cash.
How credit unions help savers
Savers have been facing paltry rates for years - but returns that have only got worse in recent weeks.
Providers such as ING Direct, Nationwide Building Society Santander and Aldermore (from the September 28) for example, have all withdrawn their savings accounts and replaced them with less competitive offers.
The best easy-access account on the market at the moment, from Principality Building Society which pays a rate of just 2.85%, and even this includes a bonus of 1.20% for the first 12 months.
Credit unions, on the other hand, generally pay a dividend rather than interest rates on their savings accounts, which can provide more handsome returns.
However, this is paid as a share of the profits to members and so varies from year to year.
To give you an idea of the returns available, Glasgow Credit Union has paid all its savers at least 3.00% a year for the past few years while the Transport Credit Union recently paid between 2.50% and 5.00% on its accounts.
Reassuringly for anyone worried about the security of their money, credit union savings account deposits of up to £85,000 are also covered by the Financial Services Compensation Scheme - just as if your money was held with a bank or building society.
All of Britain's 399 credit unions are regulated by the Financial Services Authority.
Credit Unions and current accounts
About 34,000 Britons have credit union current accounts, according to the latest ABCUL figures.
The accounts are open to all, including many of those otherwise locked out of the mainstream banking system.
Not all credit unions offer them, however. In fact, only about 25 credit unions around the country offer current account customers at the present time.
For those in need of an overdraft, the accounts are also unsuitable, as they do not come with an attached borrowing facility.
As Abbie Shelton at the Association of British Credit Unions (ABCUL) explains, "Credit unions aim to help their current account customers by not letting them go overdrawn and run up huge charges."
Instead, a small charge will be imposed if there are not enough funds in your account to pay direct debits or standing orders.
How can I join a credit union?
If a credit union sounds like it could be up your street, how do you go about joining one?
Each credit union has what's called a 'common bond' that determines who can become a member. For example, you may need to live in a city or county in which it is based or belong to a particular association or profession, such as medicine.
The ABCUL website allows you to search for the best credit union for you using either criterion.
Bear in mind that financial products on offer vary. Some of the larger credit unions offer mortgages, insurance and cash ISAs, while others provide loans and savings accounts only.
Please note: Any rates or deals mentioned in this article were available at the time of writing.