Payday lender or credit union loan

A payday loan and a credit union loan are both ways to borrow when a bank has said no, but they work in opposite directions. A payday loan is a short-term, high interest, unsecured loan, usually between £50 and £1,000, repaid in one payment on or shortly after your next payday¹. A credit union loan is a loan from a not-for-profit financial provider that exists for 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 maximum: a common rate is 1% a month on the reducing balance, an APR of 12.7%². Payday loans are priced for a few days or weeks, not months, and the rules limit the total you can be asked to repay to no more than twice what you borrowed³.

The two also differ in who can get one and how fast. Credit unions only lend to members, and membership depends on a common bond, such as where you live or work⁴. They check affordability and will only lend what you can afford⁵. A payday lender will lend to almost anyone who passes a creditworthiness check, often the same day, but at a cost built for short-term use only.

Payday loans and credit union loans: how each one works

A payday loan is a type of cash loan normally paid into your bank account. They are called payday loans because the idea is that you repay when you next receive wages or benefits⁷. The money is meant to be outstanding for days or weeks, and the price reflects that: it is a short-term, high interest, unsecured loan¹. Payday loans are not designed for large expenses such as a holiday, home improvements or Christmas, and they are not a way to pay off existing debts⁸.

A credit union is a not-for-profit financial provider that helps people access banking products such as bank accounts, savings and loans⁴. It is owned by its members, who hold savings in the union⁹. All credit unions offer savings and loans, and all can lend small amounts of money for all purposes; some can lend larger amounts over longer periods, for example to buy a car or for home improvements¹⁰. Credit unions are not banks: they cannot offer overdrafts, mortgages, electronic banking services and payment methods or business loans in the same way as a bank¹¹.

The practical difference is the shape of the borrowing. A payday loan is one lump sum, one repayment date, and a very high cost if you cannot hit that date. A credit union loan is a repayment plan, usually over two to five years for a personal loan, with interest charged on the reducing balance so the cost falls as you pay it down¹².

Cost: credit unions charge at most 3% a month

The interest a credit union can charge is limited by law. The Credit Unions (Maximum Interest Rate on Loans) Order 2013 raised the maximum from 2% per month to 3% per month, and the rate specified for loans under the Credit Unions Act 1979 is three per cent per month¹³. In Great Britain, the maximum interest a credit union may charge on loans is 3% per month, and the same cap applies to hire purchase and conditional sale agreements⁹.

That ceiling is a ceiling, not a standard price. Many credit union loans cost 1% a month on the reducing balance, an APR of 12.7%². Credit unions offer loan products suited to individual needs and at rates members can afford¹⁵, and they are significantly cheaper than payday loans or doorstep lending¹². They are, however, often more expensive than personal loans from a bank or building society, so a credit union is not automatically the cheapest borrowing available to you⁴.

Payday lending is priced differently. Since 2 January 2015 there has been an interest cap on payday loans of 0.8% per day, and no borrower should have to pay back more than twice what they have borrowed³. That cap limits the damage, but it still means a £200 loan can cost up to £400 to clear if it runs its course. The cap is a protection against the worst outcomes, not a sign that the borrowing is cheap.

Who can borrow: common bond, membership and credit checks

Credit unions work by all members sharing a common bond⁴. That may be based on where they live or work, the type of occupation they have, or their employer¹⁶. All credit unions in the UK may only accept members who have a common bond¹⁶, and membership is based on it¹⁷. In practice this typically means a credit union is either based in a local community or its members work in the same sector, such as the police¹⁸.

The common bond is wider than it sounds. Anyone can become a member, as long as they share a common bond with other members¹⁷. 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 join too¹⁰. Anyone in the house of a person with a common bond with a credit union can usually join¹⁹.

Credit unions are also a route for people the mainstream has turned down. They provide access to fair and affordable credit for people with a poor credit history, and help those who cannot access mainstream forms of credit⁵. They always consider affordability when assessing loan applications⁵, and will only lend what you can afford⁵. Some will lend to you as soon as you become a member, while others ask you to save for a set period first¹⁰.

Payday lenders take a different approach. They must check your creditworthiness before they give you a loan, roll over a loan or increase the amount of credit¹, but the bar is set for speed rather than for a long relationship. A bad credit rating will make it more expensive and harder to borrow money in general²⁰, yet the Financial Ombudsman Service has dealt with cases where a payday loan was given to someone who could not afford it, including a borrower with a bad credit history²¹.

How much you can borrow and how quickly

The amounts and the timelines are very different, and that shapes what each loan is good for.

Credit unions can lend small amounts for all purposes, and some lend larger sums over longer periods¹⁰. Some credit unions offer small loans, typically £500 to £1,000, to people on benefits at much lower rates than payday loans²². Loans can start from as little as £50⁵.

The trade-off is speed. A credit union decision typically takes between one and 10 working days¹², so a credit union loan is not a solution for money needed today. A payday loan is built for exactly that situation, which is why it is priced the way it is. If the need is urgent and small, the cost of speed is the whole point of the comparison.

Credit union or payday lender: which suits your situation

The two products suit different circumstances, and the facts point to which is which rather than to a recommendation.

A credit union loan tends to fit someone who can wait a few days for a decision, can join through a common bond, and wants a repayment plan they can budget for. Credit unions can be a more affordable alternative to banks or expensive payday loans, and sometimes offer cheaper loan rates⁷. They are not-for-profit community lenders providing affordable loans and savings⁵, and any surplus funds generated are paid back to the members as a dividend²³. Each member holds a £1 share and gets one vote, no matter how much they have in savings²³.

A payday loan tends to fit a short, one-off gap that will genuinely close on the next payday. It does not fit large expenses or paying off existing debts⁸. If the gap will not close by then, the loan rolls over, the debt escalates and you could get into financial difficulty²⁴. That is the risk the product carries.

There are other options between the two. Credit unions, budgeting loans, bank overdrafts and salary advances are all alternatives to same-day loans²⁵. If you are finding it difficult to get credit, it is worth seeing whether there is a credit union in your area, or whether you can borrow from the Social Fund²⁶. For anyone weighing up consolidation instead, a low credit score or a less-than-ideal credit history can make it harder to get approved for a consolidation loan, and may mean being offered a higher interest rate than you pay now, or a higher risk secured loan²². 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 home²⁷, and secured lending is a step with real consequences.

How to join a credit union and apply for a loan

Joining is a process, and it usually comes before borrowing.

1. Find a credit union you are eligible for. The Association of British Credit Unions runs a finder at findyourcreditunion.co.uk, and you can call 0800 015 3060⁸. Credit unions are listed separately for England, Scotland and Wales, and for Northern Ireland⁴.
2. Check the common bond. Membership is based on a common bond, such as where you live or work, your occupation or your employer¹⁷.
3. Contact the credit union. To become a member, you need to visit or call your chosen credit union to confirm what information you need to join¹⁷.
4. Provide identification. You will usually need 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 bill⁴.
5. Pay or save to become a member. You will normally be asked to pay a small fee, for example £2, or save a certain amount such as £10⁴.
6. Apply for the loan. Before applying for a loan from a credit union, you usually need to become a member²⁸. You apply directly to the credit union²², selecting the loan option you want, completing the application form, providing basic financial information and submitting it for review²⁸.

Some credit unions will lend to you as soon as you become a member, while others ask you to save for a set period first¹⁰. You usually need a history of saving with a credit union before you can borrow long-term loans and mortgages²⁹. As a member, you can usually borrow at least two or three times the amount you have in savings, depending on the credit union's loan policy²⁹.

Missed payments, rollovers and what can go wrong

Missing a payment on any loan has consequences, and they differ by product.

With a payday loan, if you cannot repay the full amount in time, the loan rolls over, the debt escalates and you could get into financial difficulty²⁴. The rules limit this: a payday loan must not be extended, or rolled over, more than twice¹, and creditors can only roll over the debt twice³⁰. When a loan does go wrong, you owe the outstanding balance, plus added interest and extra fees and charges³¹. Missing payments can lead to extra charges and can negatively affect your credit score, and make it harder to get credit in the future²⁵.

With a credit union loan, the risk is different because your savings sit with the same organisation. If you miss payments on a loan, the credit union may be able to use your savings to repay the loan²⁹. That is a real difference from a payday loan, where there is no savings pot to draw on. It also means a credit union loan is not a way to protect savings from a debt you are struggling with.

Across all borrowing, missing payments can affect your credit rating, which would make it harder to get credit in the future³². Missed payments on buy now pay later agreements also show on your credit score³³. If you are already struggling, the order in which you pay bills matters, and there is free help available.

Protection and complaints if something goes wrong

Credit union savings and loans are protected by the Financial Services Compensation Scheme⁵. The standard protection is £120,000 per person, per firm, and if each business is a separate legal entity with its own account, FSCS would protect each one up to £120,000⁶. All shares, meaning savings, in an affiliated credit union are eligible for protection under the scheme³⁴.

Most credit union loans are also specifically exempt from the Financial Conduct Authority's Consumer Credit sourcebook, known as CONC³⁵. That means credit unions are exempt from certain rules and regulations that apply to other financial services providers³⁵, and the standards applied to them, 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 CONC³⁵. The interest cap is the trade-off: credit unions are limited by law in how much interest they can charge³⁶.

If a payday loan was unaffordable when it was given, you can complain. The Financial Ombudsman Service handles complaints about unaffordable lending³⁵, and has published case studies where a payday loan was given to someone who could not afford it²¹. Complaints about payday loans are common: in Q1 2025/26 the ombudsman opened 129 complaints about short term lending, and upheld 17% of them³⁷. In the previous quarter, 25% were upheld³⁸. The ombudsman's own analysis of payday loan complaints found that damage to a credit record was the main feature in 12% of complaints and appeared in 24% of all complaints, while poor administration was the main reason in 14% and appeared in 20%³⁵.

If you are struggling with any borrowing, free and impartial help is available. StepChange, National Debtline and Citizens Advice all offer free debt advice, and your local credit union can talk through what it offers. If a lender has treated you unfairly, you can complain to the firm first and then take the complaint to the Financial Ombudsman Service if it is not resolved.