Credit Unions: a friendly alternative to high-street finance

If you are looking to borrow some money to pay for a dream holiday, buy a car or make some improvements to your house, it's likely that your first port of call in looking for finance will be your bank. After all, you already trust them to look after your money and their current loan rates are good so why go anywhere else?

While it's certainly convenient to approach the bank for a loan, the process of applying for finance can be a rocky road and, at the end of it all, you might find that your income isn't enough to finance the repayments. Similarly, if you've had credit problems in the past it's highly likely that you'll be forced into punitive interest rates or having your application turned down together. If this happens, you might then try your luck with one of the multitude of loan companies who advertise on television and in the press, or found on the internet. However, there is another option that many people don't know exists: the local credit union.

Credit Unions are financial co-operatives owned and controlled by their members. They generally operate in areas where low incomes are common and offer savings and great value loans to customers. Another benefit of Credit Unions is they are local, ethical and know what their members want. Each Credit Union has a 'common bond' which determines who can join. This bond may be for people who live or work in a particular area, work for the same employer or belong to the same association or club, such as a church or trade union.

Credit Unions work by having members pool their savings together, which can then provide a fund from which loans are made to other members. Borrowers then pay interest on the money loaned to them as they would if the loan had been through a bank. As the money in the fund belongs to individuals, the credit union 'rents' the funds from its savers, who each year receive a dividend from the money they rent to the credit union. As a result, credit unions should offer its savers a good return on the money that is placed in the fund.

In order to operate, a credit union must be successful in attracting a sufficiently large amount of savers to enable it to hold sufficient liquidity to enable it to meet members' requests for loans, share withdrawals and overheads. Furthermore, dividend payments to savers and the credit union’s operating costs have to be met out of the credit union’s profits, so a strong fund is essential for the credit union's success. As the main source of income for a credit union comes from the interest charged on members' loans, it is very important that the credit union be proactive in marketing the benefits and availability of their services.

For peace of mind, credit unions have to be registered and regulated by the Financial Services Authority, who also regulates banks, building societies and all other providers of financial services in Britain. Furthermore saving members of credit unions are protected by the Financial Services and Compensation Scheme (FSCS), who provide a safety net for customers of financial firms in the event of the firm going out of business.

When looking for finance, it is normally good practice to shop around the various resources available to get the best deal on personal loans. For some, this will involve trawling the various banks on the High Street in search of a good rate, while others will turn to the internet and price comparison websites in order to find and compare loan rates. However, bear in mind that if you can't find a deal to suit, or if the bank says 'no' it might be worthwhile having a chat with your local credit union - they might say 'yes'.

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