What a credit union loan costs: interest, APR and early repayment

A credit union loan costs what the law says it can cost, and the law is unusually strict. By law, the amount of interest charged by a credit union can be no more than 3% a month, which works out at an APR of 42.6%¹. That is a ceiling, not a going rate: many credit union loans cost 1% a month on the reducing balance of the loan, an APR of 12.7%¹. The rate you are actually offered depends on the credit union, the size of the loan and its own lending policy.

The other thing that shapes the cost is how the interest is charged. Credit union loan interest is worked out on the reducing balance, meaning you pay interest only on what you still owe, not on the amount you originally borrowed². Each repayment chips away at the balance, so the interest portion of each payment gets smaller as the loan goes on. That also means there is no penalty-style structure to fight through if you clear the loan early: once the balance is gone, no more interest accrues on it.

This page explains the cap and its history, how reducing-balance interest works in practice, what a typical small loan costs at different repayment frequencies, what happens with early repayment and missed payments, and where a credit union loan fits if your credit history is poor.

Credit union interest is capped by law at 3% a month

The maximum interest a credit union may charge on a loan is set by law, not by the credit union. The Credit Unions (Maximum Interest Rate on Loans) Order 2013 raised the limit to 3% per month on loans made under the Credit Unions Act 1979⁵. The Order came into effect on 1 April 2014, when the rate specified for the purposes of section 11(5) of the Credit Unions Act 1979 became three per cent per month⁵. Before that Order, the maximum was 2% per month⁵.

The change did not happen overnight. In December 2012 the Government published a consultation on raising the maximum interest rate that credit unions can charge, from 2 per cent per month to 3 per cent per month³. The Treasury received 43 responses³. In June 2013 HMT published a response to the consultation and agreed to proceed with the proposal⁶. Two points from that consultation still matter to a borrower today. First, the rise in the interest rate cap was not compulsory, and credit unions were able to choose whether or not to increase their rates³. Second, the new, higher cap came into effect on 1 April 2014³. So a credit union charging 1% a month in 2026 is not breaking any rule by staying well below the ceiling.

The cap has a longer history than that, and the earlier versions explain why the figures you see quoted sometimes differ. Older guidance can still be found describing earlier limits: a Welsh Parliament briefing from October 2012 states that credit union interest was capped at 2% per month on the reducing balance of a loan, or 26.9% APR⁷, and the 2006 Order that set the 2% rate had itself raised the maximum from 1% to 2% per month⁸. Going back further, credit unions were restricted to 1% per month, inclusive of all administrative costs and other expenses⁹. A Northern Ireland Assembly research paper from March 2025 confirms the current position for all credit unions in Great Britain and Northern Ireland: the maximum interest a credit union may charge on loans is 3% per month¹⁰.

One practical point follows from the cap's structure. Because the legal limit is expressed as a monthly rate on the loan, the APR you see on a credit agreement depends on how the interest is applied and over what term. The independent figure to hold in your head is the one above: 3% a month equals an APR of 42.6%, and many loans sit at 1% a month, an APR of 12.7%¹. The dedicated page on the maximum interest a credit union can charge covers the cap in more detail.

How reducing-balance interest is worked out

The defining feature of credit union loan interest is the base it is worked out on. Repayments are calculated on your reducing balance, so you pay less interest with each repayment². In other words, interest is charged on what you still owe, not on the amount you borrowed at the start.

This is how it works in practice. Each repayment period, the credit union works out interest on the balance you currently owe. Your repayment covers that interest first, and whatever is left reduces the balance. Next period, the balance is smaller, so the interest charged is smaller too, and a slightly larger share of your repayment goes towards clearing the debt itself. Over the life of the loan the interest portion of each payment falls and the capital portion rises.

The contrast that matters is with loans where interest is fixed or added up front on the full original amount. On a reducing-balance loan, the total interest you pay depends on how quickly the balance falls. Pay weekly instead of monthly and the balance falls a little sooner each time; pay more than the minimum and it falls faster still. The interest rate stays the same, but the total cost changes with your repayment pattern.

This is also why the APR and the monthly rate are not the same number. A loan at 1% a month on the reducing balance works out at an APR of 12.7%¹, because the APR reflects the total cost of the credit across a year, not simply twelve times the monthly rate. When comparing a credit union loan with any other form of borrowing, compare APRs, since that is the standard measure across the market. The page on types of credit union loan explains the different shapes of loan credit unions offer.

What a £1,000 loan costs: weekly, fortnightly or monthly repayments

Because interest is charged on the reducing balance, how often you repay changes the total cost, even at the same monthly rate. A credit union's own loan table shows the effect. Levern Credit Union publishes repayment examples: on a £100 loan repaid weekly over 52 weeks, the weekly repayment is £2.11 and the total repaid is £109.42, of which £9.42 is interest; on a £1,000 loan over the same 52 weeks, the weekly repayment is £21.05 and the total repaid is £1,094.41, of which £94.41 is interest¹².

The reason the £1,000 loan costs proportionally a little more in this table is that the interest figures are worked out on the balance outstanding at each point, and the two loans clear their balances on different patterns. The principle to take away is general: the faster the balance falls, the less interest accrues.

Many credit unions offer a choice of repayment frequency: weekly, fortnightly, every four weeks or monthly, often aligned with how you are paid. Some employers also run payroll deduction schemes with local credit unions, where the repayment comes out of your pay before it reaches you. If your income is weekly or fortnightly, matching the repayment to it can make the loan easier to manage as well as marginally cheaper, because the balance is reduced more often.

When you look at any credit union's own figures, check what is included. The legal cap on interest has, at different points in its history, been expressed as inclusive of all administrative costs and other expenses⁹, so a quoted monthly rate may already cover the credit union's costs of arranging the loan. Ask the credit union to confirm the total amount repayable, which is the figure that tells you what the loan actually costs.

Early repayment, fees and the conditions attached

Because interest accrues on the reducing balance, repaying a credit union loan early reduces the total interest you pay: once the balance is cleared, there is nothing left for interest to be charged on². This is a structural feature of reducing-balance lending rather than a special concession, and it is one of the practical differences between a credit union loan and forms of credit where charges are fixed up front.

There is no early repayment charge figure in the credit union rules, because the cap limits what a credit union may charge on the loan itself. The historical position is instructive: when the limit was 1% per month, that rate was inclusive of all administrative costs and other expenses⁹, and the modern cap works in the same way, as a ceiling on the total charge the credit union can levy through the interest rate. Fees that sit outside the interest charge are not standard across credit unions, so the reliable way to check is to ask for the total amount repayable and whether any separate charges apply.

Conditions can attach to the loan in other ways. If you miss payments on a loan, the credit union may be able to use your savings to repay it¹⁴. That is a significant difference from a bank loan: as a member, your savings sit with the same organisation you owe, and they can act as a fallback. It is one reason many credit unions hold some or all of your savings while a loan is outstanding. Kernow Credit Union, for example, states that if you have a loan, any balance above the loan amount may be withdrawn, but any other savings are held until the loan is fully repaid¹⁵.

Some credit unions also run a Save As You Borrow scheme, where a small amount is added to each repayment and put into your savings, so you finish the loan with a savings pot as well as a cleared debt. Others pay a loan interest rebate: a refund of loan interest paid to all members who borrowed during the preceding financial year, which credit unions may choose to pay¹⁵. A rebate effectively returns part of the interest if the credit union has done better financially than it expected, but it is discretionary and cannot be counted on when you budget for the loan.

If you are struggling with the repayments rather than wanting to pay early, the page on falling behind on a credit union loan sets out what happens and what to do.

Why savings come before borrowing

A credit union is a self-help co-operative whose members pool their savings to let each other borrow money at a low rate of interest¹⁶. Members' savings are used to fund loans to other credit-worthy members of the credit union¹⁵. That structure explains the borrowing rules that puzzle many first-time applicants: the money being lent is the membership's money, and credit unions manage it carefully.

The practical consequences are these. You need to be a member of a credit union to get a loan from them, and some will ask you to build up savings first¹⁷. You usually need to have a history of saving with a credit union before you can borrow, particularly for longer-term loans¹⁸. MoneyHelper makes the same point: interest rates on credit union loans are capped, but you might need to have a certain amount saved with the credit union before you can borrow¹⁹.

Once you can borrow, the amounts are tied to what you have saved. 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 union¹⁴. Business Debtline describes the same rule: credit unions allow members to borrow two or three times as much as they have saved at a low interest rate²⁰.

This is not the same as a secured loan. Your savings are not collateral in the legal sense, and the credit union does not seize them if you keep up with payments. But as noted above, it may be able to use your savings to repay the loan if you miss payments¹⁴, and some or all of your savings may be held until the loan is repaid¹⁵. The pages on saving before borrowing, borrowing against your savings and withdrawing shares while repaying a loan cover each of these points in detail.

Not every credit union requires a saving history for every loan. Some will lend to you as soon as you become a member⁴, and products such as Child Benefit loans are designed to be repaid directly from a benefit, without a savings record built up first. Ask the credit union you are eligible to join what its own policy is.

Where a credit union loan fits if your credit history is poor

Credit unions exist partly to serve people mainstream lenders turn away. The Welsh Government says credit unions provide access to fair and affordable credit for people with a poor credit history, and help those who cannot access mainstream forms of credit²¹. Its advice pages add that credit unions are good for those who find it difficult to borrow from banks due to having a poor credit history²². StepChange makes the same point from the debt advice side: credit unions may be more willing to help people on a low income, people who have poor credit, or people who do not have a previous record of borrowing²³.

It is worth being clear-eyed about the comparison. Credit unions can be a more affordable alternative to banks or expensive payday loans, and they sometimes offer cheaper loan rates²³. Citizens Advice points borrowers towards credit unions as a more affordable option than high-cost credit²⁴. But credit union loans are not automatically the cheapest borrowing on the market: they are often more expensive than personal loans from a bank or building society²⁵, because banks price aggressively for customers with strong credit records. The legal cap on credit union interest exists to keep the cost of borrowing down, but a borrower with a strong credit record may well find cheaper credit elsewhere.

The alternatives for someone with poor credit are mostly worse. If you have a poor credit rating, you may only be able to get a loan at a high interest rate or secured against your home²⁶. A low credit score can make it harder to get approved for consolidation loans and may mean being offered higher interest rates than you pay now, or higher-risk secured loans²⁷. Borrowers with a poor credit score will likely pay higher interest rates and may find fewer debt consolidation deals open to them²⁸, and low or 0% interest credit cards are hard to get without a good credit rating²⁹. Against that backdrop, a capped rate on the reducing balance is a meaningful protection.

One further point on how credit union lending is regulated. The Financial Ombudsman Service notes that the standards applied to credit union lending, 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 the FCA's consumer credit rules³⁰. Credit unions are still regulated and still covered by the ombudsman, but the lending framework they sit under is different, which is part of why they can lend where mainstream lenders will not. In Scotland and Wales, credit unions and Community Development Financial Institutions (CDFIs) are specifically supported as providers of financial help to individuals with a poor credit history¹⁰. The comparison pages on credit union loans versus payday loans, doorstep lenders and CDFIs set out the alternatives side by side.

Credit files, interest rebates and decisions

Three questions come up repeatedly about the mechanics of a credit union loan: what it does to your credit score, whether you get anything back, and how long a decision takes.

On your credit file, a credit union loan behaves like any other loan. Your credit score will dip when you first take out a new loan³¹. Once accepted, providing you make all your minimum repayments on time, this should improve your credit score in the long term³². The same rule applies to consolidation borrowing: it can help boost your score if you keep up with the payments³¹. The page on credit union loans and your credit file covers what is reported and what to check.

On getting money back, some credit unions pay a loan interest rebate: a refund of loan interest paid to all members who borrowed during the preceding financial year¹⁵. It is a discretionary payment out of the credit union's surplus, not a contractual right, so treat it as a possible bonus rather than a reason to borrow.

On decisions, the answer depends on the credit union. Some will lend to you as soon as you become a member, while others only lend after you have saved for a set period⁴. All will check affordability, looking at the money you have left after paying your bills⁴. Because credit unions are local or workplace-based organisations making their own lending decisions, the process can be quicker for small loans than a bank's, but slower where a saving history is required first. The pages on applying to borrow from a credit union and borrowing as a new member walk through what to expect.

Free life cover on the loan

When you borrow from a credit union you normally get free life insurance to cover the value of the loan, so the loan is repaid if you die before paying it back in full⁴. This is a standard feature of credit union borrowing, not an add-on you pay for separately, and it means your family should not inherit the debt.

The cover has limits, and they vary between credit unions, so it is worth confirming the details with yours: what the policy pays out, whether there are age or health restrictions, and whether it covers the full balance at any point in the term. The pages on loan protection insurance and what happens to savings and loans when a member dies explain how the cover works alongside the credit union's other protections, such as life savings insurance on your savings.

Where to get free help

If you are weighing up a loan because money is already tight, free help is available before you borrow. StepChange offers free debt advice and information on credit unions and on emergency funding options¹⁷. National DebtLine and Business DebtLine provide free guides on borrowing, budgeting and consolidation¹⁴. Citizens Advice covers borrowing options including payday loans and their alternatives²⁴, and Shelter Cymru publishes money advice for people in Wales facing a crisis, including where to find cash in a crisis³⁵. In England, Shelter lists emergency grants, loans and other money help²⁵, and nidirect has guidance on consolidating debts in Northern Ireland²⁶. The Welsh Government also publishes advice on managing credit²².

If you have already borrowed and feel the loan was unaffordable when it was made, you can complain to the lender and then to the Financial Ombudsman Service, which can look at unaffordable lending complaints³⁰. MoneyHelper, the free government-backed service, also explains credit union products including their current accounts¹⁹. None of these services charges for advice, and none will sell you a loan.