Cheaper alternatives to a payday loan

A payday loan is a short-term, high-cost cash advance designed to be repaid on your next payday¹. It is normally paid into your bank account and is meant to be paid back when you next receive your wages or benefits². These loans are an expensive way of borrowing and can leave you worse off financially³.

If you need to borrow a small amount, there are other options. Credit unions are one of them. They are not-for-profit community lenders providing affordable loans and savings⁴. All credit unions offer savings and loans⁵, and they can be a welcome alternative to payday loans or doorstep lending⁶.

Credit union loans are significantly cheaper than payday loans or doorstep lending, according to Experian⁷. Their rates are usually a bit higher than the cheapest credit cards and loans, but they can help if you are often turned down for credit elsewhere⁷. This page explains what a credit union loan offers, who can join, how much you can borrow, and what to check before you apply.

Credit unions: a cheaper alternative to payday loans

Credit unions are not-for-profit community lenders⁴. They remain an option for people who find it difficult to get credit elsewhere. If you are finding it difficult to get a loan or credit, you might be able to get a loan from a credit union¹¹.

When you are looking at ways to borrow, credit unions appear alongside other options. StepChange lists credit unions, budgeting loans, bank overdrafts and salary advances as alternatives to same-day loans². Similarly, if you owe money to family or friends, safer ways to borrow include credit union loans, an authorised overdraft, loans or help from a local authority, a wage advance from your employer, or a budgeting loan or advance from the DWP if you receive benefits¹².

Credit unions are not the only alternative. A debt consolidation loan, or finding a credit card with a better deal such as a lower interest rate to transfer your balance to, are also options¹³. A credit-builder credit card can be cheaper than high-cost credit like payday loans¹⁴. But credit unions are specifically designed for people who may struggle to access mainstream credit. They provide access to fair and affordable credit for people with a poor credit history, and help those who cannot access mainstream forms of credit or who may be unaware of affordable providers⁴.

The key difference is cost. A loan from a credit union is more affordable than a payday loan¹⁵. Credit unions offer loan products suited to your individual needs and at rates you can easily afford¹⁶. For someone considering a payday loan, a credit union loan is likely to cost significantly less⁷.

What a credit union loan offers

All credit unions offer savings and loans⁵. A credit union provides loans, savings, bank accounts and other services to their members¹⁷. Many offer a wide choice of additional products such as junior savings accounts, Christmas savings accounts, prepaid debit cards, insurance products, cash ISAs and in some cases even mortgages¹⁸.

On the loan side, all credit unions can lend small amounts of money for all purposes⁵. Some can lend larger amounts over longer periods, for example to buy a car or for home improvements⁵. Some credit unions may offer small, interest-free loans to members¹⁹.

If you fall behind on a credit union loan, they may offer support. They might reduce or pause your payments for a limited time, stop adding interest to the loan for a limited time, or help you work out a plan to pay what you owe²⁰.

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 rate²¹. You can choose to save as little or as much as you can afford¹⁶.

Why credit union loans can cost less

Credit unions are not-for-profit⁴. That means they do not need to generate profit for shareholders, which is one reason their loans can cost less than payday loans. Credit union loans are significantly cheaper than payday loans or doorstep lending⁷.

The cost difference matters most when you compare a credit union loan with a payday loan. A payday loan is a short-term, high-cost cash advance designed to be repaid on your next payday¹. Payday loans are meant to be paid back when you next receive your wages or benefits². They usually carry very high interest rates¹³. By contrast, credit unions offer loan products at rates you can easily afford¹⁶.

But credit union loans are not always the cheapest option overall. They are often more expensive than personal loans from a bank or building society²². Their rates are usually a bit higher than the cheapest credit cards and loans⁷. So if you can get a personal loan from a bank, that may cost less. The advantage of a credit union is that they may be more willing to help people on a low income, with poor credit, or without a previous record of borrowing²³.

Credit unions are good for those who find it difficult to borrow from banks due to having a poor credit history²⁴. They can be a more affordable alternative to banks or expensive payday loans, and sometimes offer cheaper loan rates²³.

Who can join a credit union: location and job

Anyone can become a member, but you must share a common bond with other members¹⁸. A common bond is often based on where you live or the type of job you do. Some credit unions require you to live in a certain area or work in a certain type of job¹⁹.

The common bond can also be based on your family. Anyone in the house of a person with a common bond with a credit union can usually join¹⁰. If one member of your family is already a member of a credit union, other relatives living at the same address can usually join too²⁰. 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 join⁵.

Eligibility is widening. One building society press release reported that eligibility will widen to include students, local workers and relatives of existing members, reflecting the way people live and work²⁵.

If you have had difficulty opening an account with a bank or building society, you could try a not-for-profit credit union²⁶. Credit unions provide access to fair and affordable credit for people with a poor credit history⁴.

You do not necessarily need to live or work near a branch. Credit unions offer access through 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 three¹⁸. Some credit unions offer payroll loans, where repayments come straight from your wages. For example, one credit union requires you to be eligible to join the credit union to access its payroll loans²⁷. Another offers loans available to members or people wishing to join who work for one of its payroll partners²⁸.

Membership comes before the loan

You must be a member of a credit union to get a loan from them¹⁰. You need to be a member to get a loan, and some will ask you to build up savings first²¹.

The process varies. Some credit unions will lend to you as soon as you become a member⁵. Others only lend after you have saved for a set period⁵. 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 saver²⁹.

Some credit unions make joining straightforward as part of the loan application. One credit union states: "If you're not a member you can join us and apply today"³⁰. Another says that if approved, you automatically become a member before your loan is completed³¹. A third requires new members to have made at least one regular payment through payroll deduction, or one month's direct debit payments, before any loan can be considered²⁸.

If you are not already a member of a credit union, you may need to join first. One credit union's payroll loan page states you must "be eligible to join Just Credit Union if you are not already a member"²⁷.

What size of loan can a credit union offer?

Most credit unions lend small loans of around £50 to £3,000⁸. Credit unions offer very competitive rates of interest on personal loans of up to about £3,000 and are happy to offer much smaller loans³². In Wales, credit unions are able to offer loans at reasonable rates from as little as £50 up to £15,000⁹.

Some credit unions offer small loans, typically £500 to £1,000, to people on benefits at much lower rates than payday loans³³. 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 improvements⁵.

The maximum a credit union can lend has historically been capped. A 2007 Northern Ireland Assembly research paper noted that loans may be made to members up to a maximum of £5,000 in excess of their share capital³⁴. Rules have since changed, and the Welsh Government confirmed in 2019 that credit unions are able to offer loans from as little as £50 up to £15,000⁹.

Are credit unions cheaper than borrowing from a bank?

It depends on the loan and your circumstances. Credit unions can be a more affordable alternative to banks or expensive payday loans, and sometimes offer cheaper loan rates²³. But credit union loans are often more expensive than personal loans from a bank or building society²². Their rates are usually a bit higher than the cheapest credit cards and loans⁷.

The trade-off is access. Credit unions may be more willing to help people on a low income, with poor credit, or without a previous record of borrowing²³. They are good for those who find it difficult to borrow from banks due to having a poor credit history²⁴. If you can get a personal loan from a bank, it may cost less. If you cannot, a credit union may be the cheaper option compared with a payday loan.

Credit unions are not banks. 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 bank³⁵. So if you need an overdraft or a mortgage, a credit union may not be able to help.

When you are shopping around, it helps to compare the total cost of borrowing, not just the monthly payment. A consolidation loan may offer advantages such as paying a lower rate of interest, lower monthly payments, a known end date, a single monthly payment, dealing with only one lender, and avoiding a bad credit rating from missed payments³⁶. But consolidation is not right for everyone, and free debt advice is available.

What to do if you cannot repay a payday loan

If you are struggling with a payday loan, contact your lender. You might be able to make lower payments for a short period if money is tight, ask to pay less for a while longer based on what you can afford, or ask for a payment holiday if you cannot afford anything at all³⁷.

Priority debts come first. Working out your priority debts helps you decide which to pay first³⁸. If you are behind on essential bills, deal with those before non-priority debts.

Free, impartial help is available. MoneyHelper provides information about credit unions and other borrowing options¹⁷. Debt advice charities including StepChange and National Debtline offer free guidance. If you are considering a credit union loan, you can check the MoneyHelper website for information about credit unions²⁹.

If you have had difficulty opening a bank account, a credit union may be able to help²⁶. Credit unions provide access to fair and affordable credit for people with a poor credit history⁴.