Credit union loans

A credit union loan is a loan from a member-owned, not-for-profit financial co-operative rather than from a bank or a commercial lender. Credit unions are community lenders that provide affordable loans and savings, and their members' savings are used to fund loans to other credit-worthy members of the same credit union¹. To borrow, you first have to join, and joining depends on sharing a "common bond" with the other members, such as living or working in the same area or working for the same employer³.

The cost is capped by law. A credit union may charge no more than 3% a month on a loan, which works out as an APR of 42.6%, and credit union loans generally carry no set-up fees, administration costs or early redemption fees⁴. Loans start from as little as £50, most credit unions lend small amounts of around £50 to £3,000, and decisions typically take between one and 10 working days¹.

What a credit union loan is and who offers one

A credit union is a group of people, connected by a common bond based on the area they live in, the occupation they work in, or the employer they work for, who save together and lend to each other at a fair and reasonable rate of interest². Credit unions are not-for-profit financial providers: they are owned by their members, the people who hold savings in them, and exist to benefit their communities rather than to make a profit³. The Welsh Government describes them simply as "not for profit community lenders, providing affordable loans, and savings"¹.

The model works in a circle. Members save with the credit union, and those savings are used to fund loans to other credit-worthy members². Interest earned on loans helps run the credit union and returns value to members rather than to outside shareholders. All credit unions offer savings accounts and loans, and many also provide bank accounts and other services to their members³.

Credit unions historically offered simple savings and loan products to financially excluded individuals, and that origin still shapes what they do today⁹. They aim to provide loans at low interest rates, and they always consider affordability when assessing loan applications¹. Most local areas have a credit union, and they range from small volunteer-run community organisations to large credit unions with tens of thousands of members¹¹. Some operate online and by phone, some through payroll partnerships with employers, and some through local branches or service points you can walk into¹⁰.

For a broader picture of the different ways to borrow, see types of loan and how personal loans work. Credit unions sit alongside other not-for-profit and affordable credit options, such as community lenders (CDFIs) and the No Interest Loan Scheme.

Joining first: the common bond and membership

You cannot borrow from a credit union without being a member, and membership is based on a common bond¹². All credit unions in the UK may only accept members who share that common bond⁹. In practice the bond usually means one of two things: the credit union is based in a local community, or its members work in the same sector, for example the police¹⁰.

The common bond can take several forms³:

• living, working, studying or volunteering in a certain area
• working in the same industry
• working for certain employers
• belonging to the same trade union

Anyone can become a member, but you must share the common bond with the other members¹². To join, you need to visit or call your chosen credit union to confirm what information you need, as each one sets its own joining process¹². You will usually need to provide two recent documents to prove your identity and address, for example a passport, driving licence, student or work ID card, bus pass, birth certificate, bank statement or energy bill³.

Joining normally means being asked to pay a small fee, for example £2, or to save a certain amount, such as £10³. Once one member of a family meets the common bond requirements and has joined, other family members living at the same address can usually join too, so a household can often belong to the same credit union¹⁰.

To find a credit union you can join, use the finder website www.findyourcreditunion.co.uk, which lists credit unions and shows which common bond each one covers¹⁰. Credit union finders are listed separately for England, Scotland and Wales, and for Northern Ireland, so the search works wherever you live in the UK³.

Interest capped by law: at most 3% a month

By law, the amount of interest charged by a credit union can be no more than 3% a month, an APR of 42.6%⁴. The same 3% per month maximum applies to credit unions in Great Britain under official guidance, and the Northern Ireland Assembly has recorded the same 3% per month maximum for loans¹³. The cap is set by 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 1979¹³.

The cap has been raised twice, and the history explains why older references quote different figures:

Before 1 June 2006, credit unions could not charge interest on loans exceeding 1% per month, inclusive of all administrative costs and other expenses¹⁶. An order made in 2006 increased the maximum rate of interest from 1% to 2% per month, effective from 1 June 2006¹⁵. The 2013 Order then increased the maximum interest rate a credit union may charge on a loan from 2% per month to 3% per month, with the rate of three per cent per month specified for the purposes of section 11(5) of the Credit Unions Act 1979 from 6 April 2014¹⁷.

The cap is a ceiling, not a standard rate. Many credit union loans cost well below the maximum, and the cap matters most for small, short-term borrowing, where it keeps credit union loans significantly cheaper than payday loans or doorstep lending⁷. Credit unions are also limited by law in how much interest they can charge, which is one reason the FCA has pointed consumers wishing to avoid high-cost credit towards joining a credit union¹⁸. How the monthly rate translates into a yearly cost is explained in how loan interest is calculated and loan APR explained.

Fees, early repayment and free loan insurance

Credit union loans do not incur set-up fees, administration costs or early redemption fees⁵. That last point matters if your circumstances change: you can generally settle the loan early without being charged for doing so. One credit union's product terms state it plainly: "You can pay off your loan early, make additional lump sum repayments or increase your regular repayments, all without penalty"¹⁹. Practices vary between credit unions, so confirm the position with yours before borrowing, and see paying off a loan early and settlement figures for how early settlement works generally.

Most credit unions also offer free life or loan-protection insurance with their loans¹⁰. This is loan life cover: if the borrower dies, the insurance can clear the outstanding balance so the debt does not fall on the estate or the family. It is a standard feature of credit union lending rather than a paid-for extra, though the cover and its conditions vary between credit unions, so check what your credit union's policy includes and excludes.

The absence of fees, combined with the interest cap, is what makes credit union loans generally cheaper than loans from most other providers for smaller amounts⁵. For a comparison of the fee position across lenders, see loan fees and charges, and for the specific question of credit union charges, see do credit unions charge fees on loans.

Types of credit union loan: saver, family, payroll and loyalty loans

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 for home improvements¹⁰. Beyond that basic personal loan, many credit unions have developed particular loan types built around their members' circumstances.

Saver loans. These are loans linked to your savings with the credit union. Members' savings fund the loans, and a saver loan recognises an existing saving history: you can usually borrow at least two or three times the amount you have in savings². Some credit unions structure the product so members can borrow up to the balance of their shares, as one credit union's saver loan terms set out¹⁹. The dedicated guide to save-to-borrow and saver loans covers how these work in detail.

Family loans. These are designed for families receiving Child Benefit: the benefit is paid to the credit union, part of it repays the loan, and the rest goes to the family. They let households spread the cost of one-off expenses without turning to high-cost credit. Family members living at the same address can usually join the same credit union once one of them has joined¹⁰. For lending within a family rather than through a credit union, see lending money to family.

Payroll deduction loans. Some credit unions run payroll partnerships with employers, so loan repayments and savings are taken directly from your pay¹⁰. This suits people in steady employment who want the repayment to happen automatically, and it is one of the delivery channels to look for when choosing a credit union.

Loyalty loans. Some credit unions offer improved terms to members with a proven saving record, on the basis that a member who has saved reliably presents a lower risk. The common thread across all these products is that the credit union looks at your history with it, not just a credit score.

Credit unions are one of the recognised alternatives to same-day and short-term loans, alongside budgeting loans, bank overdrafts and salary advances²¹. They are also an alternative to payday loans, and the comparison is set out in payday lender or credit union loan and cheaper alternatives to a payday loan.

How much you can borrow and for how long

Credit unions provide loans starting from £50¹. Most credit unions lend small loans of around £50 to £3,000, and credit unions offer very competitive rates of interest on personal loans of up to about £3,000⁶. Some can lend larger amounts over longer periods, for example to buy a car or for home improvements¹⁰.

Most credit unions offer personal loans over a two to five year repayment plan, and ten years for secured loans, although terms vary between credit unions⁷. How much you can borrow personally depends on the credit union's loan policy and on what it judges you can afford: credit unions will only lend what you can afford²². If you are a member, you can usually borrow at least two or three times the amount you have in savings, depending on your credit union's loan policy²⁰.

If you are consolidating existing debts, the same rules apply wherever you are in the UK: a credit union consolidation loan works like any other, and 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 home²⁴. See debt consolidation loans and consolidation loan or free debt advice before borrowing to clear other debts.

Saving while you borrow: locked savings and borrowing limits

Saving and borrowing are tied together at a credit union. Members' savings are used to fund loans to other members, so your savings are doing work in the credit union while you are a member². Some credit unions will ask you to build savings first, and some require a certain amount saved before you can borrow¹¹.

The borrowing limit is usually linked to your savings: you can usually borrow at least two or three times the amount you have in savings, depending on the loan policy of your credit union²⁰. Business Debtline puts the same point another way: credit unions allow you to borrow two or three times as much as you have saved at a low interest rate²⁶.

One consequence of this structure is that savings can be locked while a loan is outstanding. If you miss payments on a loan, the credit union may be able to use your savings to repay the loan, which means the money in your savings account is not entirely free to withdraw while you owe money to the same credit union²⁰. Check with your credit union what its rules are on withdrawing savings while a loan is running.

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 saver²⁷. That saving habit is also worth having for its own sake: it builds a buffer against future one-off costs, and for people on certain benefits there are separate options such as Budgeting Loans and Budgeting Advances, which have their own savings limits, for example you cannot get a full Budgeting Loan if you or your partner have more than £1,000 in savings²⁸.

How to apply and what checks are made

Applying for a credit union loan starts with joining, and the process from there is straightforward:

1. Find a credit union whose common bond covers you, using the finder website¹⁰.
2. Join, providing two recent documents to prove identity and address, and paying the small membership fee or starting to save³.
3. Save, if your credit union asks for a saving history before lending¹¹.
4. Apply for the loan, which you can often do online, by phone, in a branch or service point, or through a payroll partnership¹⁰.
5. Wait for the decision, which typically takes between one and 10 working days⁷.

The checks are different from a bank's. You usually will not have to pass a credit check, even for an overdraft on a credit union current account, because credit unions normally use manual checks to decide whether to lend³. Instead of an automated score, a person at the credit union looks at your income, outgoings and history with the credit union. Credit unions always consider affordability when assessing loan applications, and they will only lend what you can afford¹. For how affordability works across lending generally, see loan affordability checks.

This manual approach is why credit unions are often open to people a bank would refuse, and it connects to the question of getting a loan with a poor credit history. Having a bad credit rating will make it more expensive and harder to borrow money, but a credit union's assessment is not driven by that rating alone³¹. The trade-off is speed: a decision typically takes between one and 10 working days, longer than the instant decisions many online lenders give⁷.

Missed payments and where credit union loans have fewer protections

If you miss payments on a credit union loan, the credit union may be able to use your savings to repay the loan²⁰. This is the most distinctive feature of falling behind with a credit union: because your savings and your loan sit with the same organisation, the savings can be set against the debt. It reduces what you owe, but it also means the savings you thought you had are gone.

Missing payments has the same wider consequences as with any lender. Missed payments could affect your credit rating, making it more difficult to get credit in the future, and missing payments can lead to extra charges and can negatively impact your credit score³². If you cannot pay, the right move is to talk to the credit union early: as community lenders whose aim is affordable credit, they will often work with a member in difficulty rather than escalate immediately¹. For the general position, see what to do if you can't repay a loan.

There is also a protection gap to know about. Most of the loans that credit unions provide are specifically exempt from the Financial Conduct Authority's Consumer Credit sourcebook, known as CONC³³. The Financial Ombudsman Service explains what this means in practice: 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 CONC"³⁴. Credit union loans are still regulated products and complaints can still be made about them, but the detailed lending rules that bind payday lenders and most other consumer credit lenders do not bind most credit union loans in the same way.

Free, impartial help with problem debts is available from StepChange, National Debtline and Business Debtline, and MoneyHelper offers free guidance on money and borrowing. If you are struggling, debt: a complete guide sets out the help available and your rights.

FSCS protection and where it stops

Loans and savings with a credit union are protected by the Financial Services Compensation Scheme¹. For a borrower this matters less directly than for a saver, but if you hold savings with the same credit union, as many borrowers do, the protection is significant: FSCS protects up to £120,000 in total across all accounts you hold with the credit union, for individual account holders⁸. If a credit union fails, FSCS will pay compensation within seven working days of a bank, building society or credit union failing, in standard cases; more complex cases, including temporary high balance claims, take longer³⁵.

The protection covers the savings side of your relationship with the credit union. It does not insure you against being unable to repay a loan, and it does not cover the loan life insurance that comes with many credit union loans, which is a separate matter governed by the policy terms. The £120,000 limit applies per person per credit union, so savings spread across two different credit unions each get their own limit, while two accounts with one credit unit share one limit⁸. See consumer protection in UK financial services for how the scheme works overall.

Making a complaint

If you have a complaint about a credit union loan, the first step is to complain to the credit union itself, setting out what went wrong and what you want it to do. If it does not resolve the matter, the Financial Ombudsman Service can look at complaints about credit union lending, including complaints that a loan was unaffordable³⁴. The ombudsman decides whether the lender lent responsibly in the circumstances, and can order redress if it did not.

Because most credit union loans are exempt from CONC, the ombudsman applies the standards appropriate to exempt agreements, which are typically lower than those imposed on lenders and loans covered by CONC³³. That does not prevent a complaint, but it shapes what the ombudsman expects of the credit union. The process for complaining, and what the ombudsman can award, is set out in complaining about a lender or finance company and complaining about an unaffordable loan.