Credit union loans or doorstep lending: how the two compare

A doorstep loan is a personal loan brought to your home by an agent who usually calls weekly to collect repayment. It is a form of high-cost, short-term credit, and the amounts offered are smaller than most other kinds of lending¹. A credit union loan is made by a not-for-profit lender owned by its members, and by law the interest it can charge is capped at 3% a month, an APR of 42.6%².

That cap is the single biggest difference. Many credit union loans cost far less than the ceiling: a common rate is 1% a month on the reducing balance, an APR of 12.7%². Doorstep lending has no equivalent cap, and the weekly collection that makes it convenient is also what makes it expensive.

The two also differ in who they will take on. Credit unions provide access to fair and affordable credit for people with a poor credit history, including those who cannot get mainstream credit³. Doorstep lenders lend to people the banks often will not, but at a price. Which suits a particular borrower depends on how much is needed, how quickly, and whether they can join a credit union at all.

How a credit union loan differs from a doorstep loan

A doorstep loan is a type of personal loan you get from people who visit your home¹. It is also called home collection credit or home credit, and the Financial Ombudsman Service describes it as an unsecured cash loan arranged at a borrower's home⁵. These loans are unsecured and non-priority, usually repaid weekly, and the amount of credit offered is lower than other forms of lending, with high interest rates⁶.

A credit union is a different animal altogether. It is a not-for-profit financial provider that helps people access banking products such as bank accounts, savings and loans⁷. Credit unions are not-for-profit community lenders providing affordable loans and savings³. Members' savings are used to fund loans to other credit-worthy members⁸.

The practical differences follow from that structure:

• Where the money comes from. A doorstep lender lends its own capital. A credit union lends out what its members have saved⁸.
• How repayment is collected. Doorstep loans are usually repaid weekly to an agent at the door⁶. Credit unions take repayment by standing order, payroll deduction or in person, depending on the union.
• What else you get. A credit union provides loans, savings, bank accounts and other services to members⁷. A doorstep loan is a single product.
• What a credit union cannot do. A credit union is not a bank and cannot offer overdrafts, mortgages, electronic banking services and payment methods or business loans in the same way as a bank⁹.

What credit union loans cost: capped at 3% a month

The maximum interest a credit union may charge on a loan is 3% per month⁹. That figure comes from the Credit Unions (Maximum Interest Rate on Loans) Order 2013, which increased the limit on the interest a credit union may charge on loans made under the Credit Unions Act 1979¹⁰. Before that order the ceiling was 2% per month¹¹.

The rate specified for the purposes of section 11(5) of the Credit Unions Act 1979 is three per cent per month¹⁰. The order came into force on 1 April 2014¹⁰.

In practice, most credit unions charge well below the cap. Many credit union loans cost 1% a month on the reducing balance of a loan, an APR of 12.7%². The cap is a ceiling, not a price list, and each credit union sets its own rates within it.

Two points about the cap are worth holding on to. First, it applies to the interest charged, so a credit union cannot make a loan expensive by loading the rate. Second, it does not mean every credit union loan is cheap for every borrower: a small loan repaid over a short period still costs something, and the total interest depends on how long the money is borrowed for.

Who can borrow from a credit union: the common bond

All credit unions in the UK may only accept members who have a "common bond"¹². That bond may be based on where they live or work, the type of occupation they have or their employer¹². In practice it means working for a particular employer or in a particular industry, or simply living or working in a specified geographical area¹³.

You must be a member of a credit union to get a loan from them¹⁴. Membership normally means paying a small fee, for example £2, or saving a certain amount such as £10⁷. You will usually need to provide two recent documents to prove your identity and address, such as a passport, driving licence, student or work ID card, bus pass, birth certificate, bank statement or energy bill⁷.

There are routes in for people who do not obviously fit:

• Household members. Anyone in the house of a person with a common bond with a credit union can usually join¹⁴.
• Family at the same address. As long as one member of a family meets the common bond requirements and has joined, the other family members living at the same address can usually join⁸.
• Through work. Some credit unions run a payroll partnership with an employer¹⁵.

Most local areas have a credit union, and there are more than 500 credit unions in Britain². Credit union finders are listed separately for England, Scotland and Wales, and for Northern Ireland⁷.

Saving first, borrowing later: how credit union lending works

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 rate¹⁶. If you are a member, you can usually borrow at least two or three times the amount you have in savings, depending upon the loan policy of your credit union⁴.

That link between saving and borrowing is the feature that most surprises new members. Some credit unions will lend to you as soon as you become a member; others only after you have saved for a set period¹³. Some will ask you to build up savings first¹⁷. If you join a credit union and start saving with them, you will also be able to apply to borrow money once you have proved you are a reliable saver¹⁶.

Credit unions always consider affordability when assessing loan applications³. The assessment looks at what is left after bills rather than at a credit score alone¹³. Some credit unions provide loans starting from £50³.

Paying back a credit union loan

Repayment arrangements vary by credit union. Larger credit unions offer extra services including budgeting accounts, current accounts and debt management alongside the basic savings and loan products⁸. Delivery channels include online and phone banking, a payroll partnership with your employer, a local branch or service point you can walk into, or a combination of all three¹⁵.

One feature unique to credit unions is the loan interest rebate. Credit unions may choose to pay a loan interest rebate, which is a refund of loan interest paid to all members who borrowed during the preceding financial year⁸. It is discretionary, not guaranteed, and depends on the credit union's performance that year.

Savings held with a credit union normally earn a dividend rather than interest, usually paid annually⁸. Withdrawals can be made by cashing a cheque at a local Post Office, taking cash from a local credit union office, having payment made directly into a bank account, or using a debit card at a cash machine if the credit union operates a current account⁸.

If you are finding it difficult to get credit, one option is to see if there is a credit union in your area instead, or to see if you can borrow from the Social Fund¹⁸. If you are finding it difficult to get a loan or credit, you might be able to get a loan from a credit union¹⁹.

If you fall behind on repayments

The consequence that catches people out is the link between savings and loans. If you miss payments on a loan, the credit union may be able to use your savings to repay the loan⁴. That is a real risk for anyone who has built up savings while borrowing, and it is worth understanding before taking a loan rather than after.

For doorstep lending and other consumer credit, the rules are different. If you miss a repayment, firms need to contact you to let you know and explain what this means, and lenders need to provide support if you are struggling to make repayments²⁰. Lenders also need to check whether you can afford to repay before you take out an agreement²⁰.

Where a debt is not being paid, a creditor can apply for a third party debt order. Usually it is your bank or building society that is holding your money, but if you are due a lump sum such as a redundancy settlement, an inheritance or an insurance policy payout, that can be caught too²¹. There is a protection specific to credit unions and building societies: money is left alone if it is in a building society or credit union account and you would be left with less than £1 if the debt were paid. This does not apply to other bank accounts²¹.

If you are behind with rent, your landlord can ask for the housing element of Universal Credit to go directly to them once you are two months or more behind²². Free and impartial help is available from MoneyHelper and from debt advice charities such as StepChange and National Debtline.

Where credit union protection has limits

Credit union members get real protections, but they are not identical to those attached to a bank loan.

The Financial Ombudsman Service can look at complaints about unaffordable lending, but most of the loans that credit unions provide are specifically exempt from the Financial Conduct Authority's Consumer Credit sourcebook, known as CONC²³. Credit unions are exempt from certain rules and regulations that apply to other financial services providers²⁴. The standards applied to credit union loans, for example the level of checks a lender may have needed to do before lending, will typically be lower than those imposed on lenders and loans covered by CONC²³.

On the savings side, protection is stronger. Loans and savings are protected by the Financial Services Compensation Scheme³. The FSCS can only protect money held by UK branches of authorised banks and building societies and credit unions²⁵. Where banks share a banking licence, they share protection limits across all the accounts within the banks in that group, not separate limits for each bank²⁵. Credit unions that can take deposits do appear in the FSCS protection checker, unlike most mutual insurers²⁶.

Most credit unions also offer free life or loan-protection insurance⁸. Cover is not unconditional. One credit union's terms state that it will not pay a life insurance benefit for the loan on an insured member if their death results from an illness or injury for which the member received medical advice, consultation or treatment within the six month period prior to the loan date, unless the member dies six months or more after the loan date²⁷.

Finding and joining a credit union

Most local areas have a credit union¹⁴. A finder website at www.findyourcreditunion.co.uk can help you locate one¹⁵. Credit union finders are listed separately for England, Scotland and Wales, and for Northern Ireland⁷.

The steps are straightforward:

1. Find a credit union whose common bond you fall within, using the finder for your nation⁷.
2. Visit or call your chosen credit union to confirm what information you need to join¹³.
3. Provide two recent documents to prove identity and address⁷.
4. Pay the membership fee, for example £2, or save the required amount such as £10⁷.
5. Start saving, and ask about the loan policy if borrowing is the aim¹⁶.

Lots of smaller credit unions rely on volunteers, and only the larger ones have paid staff¹⁴. That affects opening hours and how quickly things get done, but not the legal cap on what a loan can cost.

If you are finding it difficult to get credit, a credit union in your area is one alternative worth checking, alongside the Social Fund¹⁸. Free guidance on borrowing is available from Citizens Advice and MoneyHelper.