Borrowing against your savings

A credit union is a self-help co-operative whose members pool their savings so they can borrow from each other at a low rate of interest¹. When you borrow against your savings, the money you hold in the credit union acts as security for the loan. One credit union describes a saver loan as borrowing at its lowest rate against any savings currently held in your credit union account².

The amount you can borrow is usually a multiple of what you have saved. Credit unions generally allow you to borrow two or three times as much as you have saved at a low interest rate³, and one credit union says a member can normally borrow up to the amount of their savings at any time⁴. Interest is capped by law at no more than 3% a month, an APR of 42.6%⁵.

This page explains how a loan secured on your shares works, what it costs, who can join, how to apply, and what happens if you miss a repayment.

How borrowing from a credit union works: save first, then borrow

Credit unions are saving schemes run by their members which also allow you to borrow two or three times as much as you have saved at a low interest rate³. Members' savings are used to fund loans to other credit-worthy members of the credit union⁹. That is the central mechanic: your shares are not just a savings pot, they are the pool that funds lending, and they can also stand behind your own borrowing.

You need to be a member of a credit union to get a loan from it, and some will ask you to build up savings first⁷. If you join a credit union and start saving with it, you will also be able to apply to borrow money once you have proved you are a reliable saver¹⁰. In practice this means a period of regular saving before a first loan, which some credit unions shorten for members who join and apply at the same time.

A loan secured on savings is different from a loan secured on your home. One credit union states that its secure loan is secured against your credit union savings, not your home or any other asset¹¹. That distinction matters: the lender's claim is on the money you have saved with it, not on property you own.

Loan sizes and interest: capped at 3% a month (APR 42.6%)

By law, the amount of interest charged by a credit union can be no more than 3% a month, an APR of 42.6%⁵. The cap was raised to 3 per cent per month by the Credit Unions (Maximum Interest Rate on Loans) Order 2013¹². Earlier legislation set a lower ceiling: the 2006 instrument records an associated APR of 12.68% at the 1% per month cap¹³. The two documents disagree on the older figures, and the current rule is the 3% monthly maximum.

That is a ceiling, not a typical rate. Credit unions offer very competitive rates of interest on personal loans of up to about £3,000 and are happy to offer much larger loans⁵. Credit union current accounts can include access to borrow money using an overdraft, normally with daily interest up to 42.6%¹⁴.

How much you can borrow depends on the credit union's own policy. If you are a member of a credit union, you can usually borrow at least two or three times the amount you have in savings, depending upon the loan policy of your credit union⁶. One credit union says that normally a member can borrow up to the amount of their savings at any time⁴. Another advertises borrowing up to £450,000 on a mortgage¹⁵.

Who can join: the common bond

Anyone can become a member of a credit union, but you must share a common bond with other members¹⁶. That bond can be based on the area members live in, the occupation they work in, or the employer they work for¹⁷. Some credit unions have an occupational common bond, so membership is not open to everyone¹⁸. One credit union opens membership to anyone living or working in its common bond, employed by one of its employer partners, or a member of Community Trade Union¹⁹.

The common bond also decides who else in your household can join. Anyone in the house of a person with a common bond with a credit union can usually join²⁰. As long as one member of a family meets the common bond requirements and has joined the credit union, the other family members living at the same address can usually join too²¹. One credit union admits relatives who live within the same household as a qualifying member²², and another admits a close relative of an existing member who is employed by a listed employer and lives at the same address as that relative²³.

If you are not sure whether you qualify, the common bond is the first thing to check, and the finder website can help you locate credit unions.

How to join and apply for a loan

The process differs between credit unions, but the steps are broadly the same.

1. Check you share the common bond, such as living in the area, working for a listed employer or belonging to a trade union¹⁷.
2. Apply for membership. Some credit unions let you apply online, at a branch or over the telephone²⁴, and some let you join and apply for a loan at the same time by choosing a combined option when you start²⁵.
3. Open a savings account and begin paying in. Some credit unions ask you to build savings before lending⁷.
4. Apply for the loan once you have a savings record. One credit union asks only that you be a member or eligible to join²⁶, and another accepts applications online²⁷.
5. Repay, often by payroll deduction or direct payment, with interest charged in line with the product's terms²⁸.

Some credit unions use paper forms: one asks members to request a membership form by email or download it²⁹. Others run specific saver products, such as a save as you repay account where you get started through the join page³⁰.

If you miss a repayment, your savings can be used

This is the risk that comes with borrowing against savings. If you miss payments on a loan, the credit union may be able to use your savings to repay the loan⁶. The same rule appears in guidance for Scotland³¹ and in business debt guidance³².

Some credit unions set out the mechanics in their terms. One states that should you miss more than two consecutive loan repayments without consultation or permission from the credit union, then the credit union reserves the right to periodically deduct any outstanding interest from your shares without prior notification³³. Another warns that if you do not meet the repayments on your loan, your account will go into arrears, which may affect your credit rating and may limit your ability to access credit in the future³⁴.

Not every savings account can be used as security. One credit union states that loans from it will be secured against savings held in its instant access account, but that loans may not be secured against savings held in its premier savings account, including loans from that credit union and other lenders³⁵.

If you are behind on repayments, free help is available. StepChange provides debt information and emergency funding guidance⁷, and National Debtline publishes guides on consolidating debts in England and Wales⁶ and in Scotland³¹.

Protection and where to get help

Loans and savings are protected by the Financial Services Compensation Scheme⁸. One credit union states simply that savings are protected by the FSCS³⁶. Credit insurance is not eligible for FSCS protection³⁷, so a policy sold alongside a loan sits outside that safety net.

Some credit unions in Northern Ireland also take part in the Savings Protection Scheme, owned and operated by the Irish League of Credit Unions, which can intervene to protect members' savings by making financial assistance available to a credit union experiencing difficulties³⁸. Another describes the same scheme as providing extra protection by offering financial assistance to any credit union in difficulty³⁹, and a third says it is available to proactively intervene to help any credit union which may experience difficulties⁴⁰.

Many credit union loans include free life insurance to cover the value of the loan, so the loan is repaid if you die before paying it back in full²¹. One credit union includes life insurance at no cost to the borrower⁴¹, and another advertises free protection on life savings and loans³⁶.

If you need help with money problems, free and impartial services include StepChange⁷ and National Debtline⁶. If you are finding it difficult to get credit, you can see whether there is a credit union in your area instead of using high-cost lenders⁴².