Credit unions are local, member-owned lenders. For small loans, they’re often far cheaper than payday credit.
Need to know
- Credit unions are not-for-profit financial co-operatives owned by their members.
- In Great Britain, credit unions can charge no more than 3% a month, which is 42.6% APR, and many charge less.
- You usually need to live or work in an area, or belong to a group, to join.
- Deposits in credit unions are protected by the Financial Services Compensation Scheme.
Credit unions are owned by their members and run for their benefit rather than for shareholders. Many offer small loans that cost far less than payday credit.
How credit unions work
Members save into the credit union, and those savings fund loans to other members. To join, you usually need a “common bond”, such as living or working in a particular area, or working for a certain employer.
What they can charge
In Great Britain, the law caps credit union interest at 3% a month, which works out at 42.6% APR. Many credit unions charge less, especially on larger loans.
A worked example
Borrowing £300 over six months at the maximum rate of 3% a month means monthly payments of about £55.38, and around £32 in interest in total. Figures are rounded and for illustration.
| Credit union loan | Payday loan | |
|---|---|---|
| Typical cost | Capped at 3% a month | Capped at 0.8% a day |
| Typical term | Months to years | Weeks to months |
| Ownership | Members | Private company |
| Savings | Often encouraged alongside the loan | Not usually |
| Deposit protection | FSCS covers savings | Not applicable |
Helpful step
Ask whether the credit union offers a “jam jar” or budgeting account, or a savings scheme alongside your loan. Building even small savings can reduce the need to borrow next time.
Things to check
- membership requirements and how long joining takes
- whether you need to save before borrowing
- the APR and the total amount repayable
- how repayments are collected
Remember
Credit unions still check whether a loan is affordable. If yours can’t lend, ask about other help, and see our guide to alternatives to payday loans.
Making the switch
If you’ve used payday loans before, a credit union can be a way to borrow at a lower cost while building savings. For the costs you’d otherwise face, see our guide to the FCA price cap.
Your questions answered
Do credit unions check my credit?
Most do some checks and look at affordability, but many are willing to lend to people with weaker credit histories.
Do I need to save before I can borrow?
Some credit unions ask you to save for a while first, while others lend straight away. Ask your local credit union about its rules.
How do I find a credit union?
The trade bodies for credit unions have online search tools, or you can ask your council or a local advice centre.
This guide is general information, not financial advice. Late repayment can cause you serious money problems. For help, go to moneyhelper.org.uk. We don’t arrange loans or work with lenders. Before borrowing, check the lender is authorised on the FCA register, and consider free debt advice from MoneyHelper, StepChange, National Debtline or Citizens Advice.