Types of credit union loan

A credit union is a not-for-profit community lender, and the loans it offers are built around its members rather than around a product catalogue. Every credit union provides loans, savings and often bank accounts to its members¹, and you must be a member before you can borrow from one². The main types of loan are a standard personal loan, a loan secured on your savings, a small starter loan for new members or first-time borrowers, and a family loan repaid through Child Benefit. A few credit unions also lend larger amounts over longer periods, for example for a car or home improvements³.

The amounts are modest by bank standards. Most credit union lending is in small sums, typically from around £50 up to about £3,000⁴, and how much you can borrow is usually tied to what you have saved with the credit union. Interest is capped by law: in Great Britain the maximum a credit union may charge is 3% per month⁵, and many loans cost around 1% a month on the reducing balance, an APR of 12.7%⁶. Credit unions will only lend what you can afford, after checking the money you have left over once your bills are paid⁷.

What credit unions lend and who can borrow

Credit unions are not-for-profit community lenders providing affordable loans and savings⁸. All credit unions can lend small amounts of money for all purposes, and some can lend larger amounts over longer periods, for example to buy a car or to pay for home improvements³. Alongside loans, all credit unions offer savings accounts, which either pay interest or a share of any profits¹.

To borrow, you first have to join, and joining means sharing a "common bond" with the other members. That bond might be living, working, studying or volunteering in a certain area, working in the same industry or for certain employers, or belonging to the same trade union¹. Membership of a credit union is always based on this common bond⁹, and all credit unions in the UK may only accept members who share one¹⁰.

When you can borrow depends on the credit union. Some lend to you as soon as you become a member, while others only lend after you have saved with them for a set period. Either way, the credit union checks your affordability, looking at the money you have left after paying your bills³. Credit unions will only lend what you can afford⁷, and they are a recognised option for people who find it difficult to borrow from banks because of a poor credit history⁷.

Two limits are worth knowing about. First, a credit union is not a bank: it cannot offer overdrafts, mortgages, electronic banking services and payment methods, or business loans in the same way a bank can¹¹. Second, the community lending sector, which includes credit unions and community development finance institutions, is a growing source of affordable credit but still has limited reach¹², so there may be no credit union covering your area or workplace. The guides on how to join a credit union and finding a credit union you can join cover the practical steps.

Standard personal loans: usually two or three times your savings

The standard credit union loan is an unsecured personal loan, repaid in regular instalments. The size of the loan is usually linked to your savings: 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 on the credit union's loan policy¹³. Business Debtline gives the same range, two or three times your savings, and notes it depends on the loan policy of your particular credit union¹⁴.

Credit unions offer very competitive rates of interest on personal loans of up to about £3,000, and are happy to offer much smaller amounts than many mainstream lenders⁶. That makes the standard personal loan the workhorse of credit union lending: a few hundred pounds for a broken washing machine, or a larger sum spread over a year or two for a car.

Because the loan is unsecured, the credit union is lending on its assessment of your income and outgoings rather than on an asset. The affordability check looks at what is left after your bills³, and the credit union will only lend what you can afford⁷. If your savings are small or you are a new member, the credit union may start you on a smaller loan and invite you to borrow more once you have a repayment record with them. The page on applying to borrow from a credit union explains what the application involves, and borrowing as a new member covers the first-loan experience.

Loans secured on your savings

Most credit unions also offer a loan secured on your own savings. One credit union describes this as a loan equal to your savings balance, at its lowest interest rate, with the application process quick and the loan paid on the same day¹⁵. Because the credit union holds your savings as security for exactly the amount lent, the risk to it is minimal, which is why these loans tend to be the cheapest a credit union offers and the quickest to arrange.

The trade-off is simple: while the loan is outstanding, you generally cannot withdraw the savings that secure it. Your money stays yours, and savings with a credit union are protected by the Financial Services Compensation Scheme⁸, but it is locked behind the loan. As you repay, the amount secured falls and more of your savings may become available, depending on the credit union's rules.

MoneyHelper notes that interest rates on credit union loans are capped, but that you might need to have a certain amount saved with the credit union before you can borrow¹. A savings-secured loan is the clearest case of that: the savings are the condition of the loan. This type of loan suits someone who has built up savings but does not want to spend them outright, perhaps keeping the money for a planned expense later while meeting a need now. The narrow guide to borrowing against your savings covers the mechanics, and withdrawing shares while repaying a loan explains when your money is released.

Family loans repaid with Child Benefit

A family loan is a small loan designed for parents and carers, repaid through your Child Benefit. One credit union offers family loans of £300 to £700, applied for through an online form, with repayments made from your Child Benefit¹⁵. The purpose is usually to spread the cost of things children need, such as school uniforms, shoes, equipment or a birthday, over a period rather than paying in one lump.

The defining feature is the repayment route. Instead of paying the credit union from your bank account each month, the Child Benefit is routed so the repayment is taken first and the balance comes to you. That structure is why these loans are sometimes called Child Benefit loans, and the dedicated page on Child Benefit loans explains how the payment is arranged in detail.

Because the loan is repaid from Child Benefit, eligibility is tied to receiving that benefit, and the credit union will still only lend what it judges affordable⁷. The sums are deliberately small, in the £300 to £700 range in the example above¹⁵, which keeps the repayment period short and the total interest low. For back-to-school costs specifically, the guide to loans for school uniforms and back-to-school costs sets out the options.

Small first loans from £50, and borrowing in an emergency

Credit unions provide loans starting from £50⁸, and small credit union loans run to around £50 to £3,000¹⁶. That lower end is where credit unions differ most sharply from mainstream lenders, many of which will not lend sums this small, and from high-cost alternatives. Payday loans, by comparison, are typically between £50 and £1,000¹⁷.

A starter or first loan is a small sum lent to a new member, often before they have much of a savings record, to establish that they can repay. StepChange describes credit unions as an alternative borrowing option to payday loans², and the comparison matters because of what a payday loan is: a type of cash loan, normally paid into your bank account, intended to be paid back when you next receive your wages or benefits, and usually carrying very high interest rates¹⁸. A credit union small loan covers the same kind of emergency, a boiler failure, a travel cost, a bill that cannot wait, but at a capped rate⁵ and with repayments spread over a longer period.

For a genuine emergency, a credit union loan is one option among several, and not always the fastest, since the credit union has to check affordability first³. It is worth knowing that some emergencies have dedicated help attached: for example, additional support credit, emergency credit and friendly-hours credit offered by prepayment meter suppliers must all be repaid, so they are borrowing too, not grants¹⁹. The comparisons of credit union loans versus payday loans and credit union loans or doorstep lending set the options side by side.

Saving while you borrow

Saving and borrowing are linked throughout credit union lending, and not only through the savings-secured loan. Members' savings are used to fund loans to other credit-worthy members of the credit union²⁰, so every loan is, in a real sense, backed by the savings of the other members. That is why credit unions encourage saving alongside borrowing rather than treating the two as opposites.

If you join a credit union and start saving with them, you can apply to borrow once you have proved you are a reliable saver²¹. You usually need a history of saving with a credit union before you can borrow, particularly for longer-term loans²². Borrowing terms are usually at a low interest rate, and the repayments can have some flexibility²², which reflects the mutual structure: the credit union is lending its members' money and wants the loan to finish with the member better off, not worse.

Many credit unions build saving into the loan itself, so that each repayment adds a small amount to your savings as well as reducing the debt. Over the life of the loan this can leave you with a savings pot you did not have before, which is one of the features that distinguishes credit union borrowing from a bank loan. The page on Save As You Borrow explains how these plans work, and saving before borrowing answers the common question of whether you need savings at all before applying.

Interest, fees and early repayment

Interest on credit union loans is capped by law. In Great Britain, the maximum interest a credit union may charge on loans is 3% per month⁵. In practice many credit union loans cost 1% a month on the reducing balance of the loan, which works out at an APR of 12.7%⁶. Because the interest is charged on the reducing balance, the amount of interest falls each month as the debt is paid down, rather than staying fixed on the original amount.

Credit unions may also choose to pay a loan interest rebate, which is a refund of loan interest paid to all members who borrowed during the preceding financial year²⁰. Not every credit union pays one, and it is discretionary, but where it exists it effectively returns part of the cost of borrowing to members.

Early repayment is generally straightforward. One credit union states that you can pay off your loan early, make additional lump sum repayments or increase your regular repayments, without a penalty²³. That is the opposite of many secured and longer-term loans, where there are often penalties for paying off the loan early, known as early repayment charges²⁴. The rules on high-cost credit in the FCA Handbook, CONC 5D, do not apply to a credit union²⁵, so the specific protections that chapter gives borrowers against certain high-cost lenders sit alongside, rather than within, credit union lending.

The full breakdown of costs, including how APR is worked out and what a loan illustration must show, is on what a credit union loan costs, and the legal ceiling is explained on the maximum interest a credit union can charge.

A savings-secured loan is not a homeowner loan

The word "secured" does two different jobs in lending, and the difference matters more than almost anything else on this page. A secured loan means you borrow against an asset, such as a house²⁶. If you cannot repay what you owe, the lender can take your asset and sell it²⁷. With a credit union savings-secured loan, the asset is your own savings: if you cannot repay, the savings cover the debt, and nothing else is at stake.

A loan secured on your home is a different matter. Some lenders make it a condition that you offer your property, usually your home, as security for the loan, and if you do not keep up repayments the lender can take court action to repossess the property²⁸. If you cannot pay a home-secured debt, the lender can apply to the courts and force you to sell your home to get its money back²⁴. The only way to get out of a secured loan is to pay it off in full, and there are often early repayment charges for doing that early²⁴.

Many home-secured loans are offered as a way to consolidate debts, with interest rates lower than unsecured personal loans because the risk to the lender is reduced²⁴. Unsecured loans, by contrast, include personal loans, student loans, overdrafts and credit cards³⁰, and none of them put your home directly at risk. A standard credit union personal loan and a credit union savings-secured loan are both on the unsecured side of that line in terms of your property.

There is a further legal wrinkle worth knowing. Certain types of agreement secured on land are not considered regulated mortgage contracts, and this includes some secured loans where the lender is a credit union³¹. Time orders, a court power that can reshape mortgage repayments, also exclude some secured loans where the lender is a credit union³¹. These exclusions do not make a credit union loan unsafe, but they do mean the rulebook around it is not identical to the one around a bank mortgage, and the page on credit union legislation covers the framework.

Where credit union loans are limited to local members

Because membership rests on a common bond, credit union lending is limited by geography or by association. All credit unions in the UK may only accept members who share a common bond¹⁰, which in practice means a credit union serving a town or county can only lend to people connected to that area, and a workplace credit union can only lend to employees in that employer or industry.

The common bond can also travel with you. If you joined through your employer or trade and later move house or change job, your membership usually continues, which is explained on keeping your membership after you move or change job. But it does mean that the credit union a friend or relative uses may simply not be open to you, and two people in the same street may be eligible for entirely different credit unions.

Finding the ones you can join means using a finder service. MoneyHelper lists credit union finders separately for England, Scotland and Wales, and for Northern Ireland¹, and the site's own credit union directory lists credit unions by area and by the common bonds they accept. The page on the common bond explains each type of bond and how eligibility is checked.

What protects borrowers, and where it stops

Savings and loans with a credit union are protected by the Financial Services Compensation Scheme⁸, which covers members if the credit union itself fails. That protection covers the money you have saved, not the money you have borrowed, and it does not step in if you cannot keep up repayments. If you fall behind, the route is to talk to the credit union early; the page on falling behind on a credit union loan sets out what happens and where free debt help is available.

Legal protection is more uneven than with a bank loan. The Consumer Credit Act, which underpins rights such as the right to information and the treatment of arrears, does not regulate every debt: mortgages, debts to family or friends, debts to unlicensed lenders or loan sharks, household bills, some credit union loans, charge cards and some business debts all fall outside it²⁹. Which credit union loans are outside the Act depends on the type of agreement, so it is worth confirming with the credit union what rules your loan is made under.

Two further limits are worth knowing. The Payment Systems Regulator's mandatory reimbursement policy for authorised push payment scams excludes credit unions, along with municipal banks and national savings banks³², so the rules that can reimburse scam victims who bank elsewhere do not apply in the same way to credit union accounts. And if something goes wrong with a loan and the credit union does not put it right, the Financial Ombudsman Service is the free independent body that can look at complaints about credit and borrowing³³. The guide to consumer protection in UK financial services brings the whole picture together.