Are credit unions an effective option for savers and borrowers?

For many consumers both saving and borrowing has become increasingly difficult over the past couple of years. Although interest rates have plummeted over recent months many lenders have not reduced their borrowing costs in line with the base interest rate drop, and for those that have damaged credit the chances of getting an affordable loan are very slim. Likewise, savers have also been hit hard by interest rate cuts, as banks have been quick to cut the rates on savings accounts, which means that many savers are getting paltry returns on their savings.

Many people have also lost complete confidence in the banking system in the UK, which is not surprising given all the reports of multi-billion pound bailouts. Executive bonuses and pensions, and rip off charges amongst other things. The good news is that there is an alternative option for many consumers when it comes to saving and borrowing, and rather than going through a mainstream bank you could actually choose to go for a local credit union.

A credit union is basically a financial co-operative, and these unions are owned and managed by members. This is done by members pooling their savings, which provides the credit union with the ability of offer members loans at very low rates of interest. A credit union is based on members having some form of bond in common with one another, such as all living within a certain postcode area or all working for the same employer.

Credit unions have become increasingly popular, particularly over the past couple of years when many people have found it increasingly difficult to get affordable credit and have found the level of returns on their savings plummeting. They are also increasingly popular amongst the many people that have lost confidence in the traditional banking system following a myriad of problems and issues that have arisen over recent years.

With members depositing their savings into a common fund, any profit that is made by the credit union is used to try and make it as cheap as possible for members to borrow money. With a credit union members are able to borrow small amounts for a matter of months if they wish, which means that these unions are far more flexible when it comes to making loans to members than a traditional bank would be.

Members of credit unions charge a maximum of 2 percent interest per month on their borrowing, and in many cases the interest charged is even less than this depending on your credit union. Another major benefit to being a member of a credit union is that as a member you receive free life insurance, so you save the money that you would normally pay on life insurance premiums.

When it comes to saving money with a credit union you can be certain of the utmost flexibility and convenience. You can pay in as little or as much as you like and you can deposit money as often as you wish. You can choose to have the money taken straight from your wages, or there are a number of other options open to your when it comes to paying money into the account.

Once a year the credit unions aim to pay members a dividend, although there is no interest currently paid on savings. However, this could change later on this year. The dividend amount depends on the type of account chosen and the level of savings, and is usually 2-3 percent of the amount saved, which is still higher than most bank savings accounts at present, and in some cases can be as high as 8 percent.

As of May of this year credit unions will be given an option to scrap the dividend payment and instead offer interest to their members on their savings. With the various benefits on offer to members, it seems that credit unions are becoming an increasingly viable and effective option for both savers and borrowers in the UK, and members will even have their savings guaranteed in the event that the credit union folds, as the money is covered under the Financial Services Compensation Scheme.

Last year the government also looked into overhauling the credit union sector to boost the use of these co-operatives.

One government official said: ‘The excellent services provided by co-operatives and credit unions take place within an outdated legislative framework and overhauling this will be key to achieving a significant expansion of the sector. I want the sector to thrive and grow further, to be widely seen as a genuine alternative to proprietary companies across the country, not stereotyped as ‘old fashioned’ or confined to its northern roots. This is a vision of credit unions as the modern day equivalent of 18th century ‘town banks’, providing a local, trusted, alternative to the national banks on every high street. To achieve this vision means removing barriers to co-operatives competing fairly in the marketplace, and enabling them to bring a greater range of services to a wider range of people.’