We hear a lot about credit unions: about how they serve the communities they are based in, about how they help consumers who wouldn’t be able to borrow anywhere else and about how they offer loans at lower interest rates than other types of finance. But credit unions – often hailed as the antidote to payday loans and other forms of sub-prime finance – are in decline. Figures released last year showed that while there were 835 credit unions operating in the UK in 2001, that number had fallen to just 523 in 2014. Find your local credit union.

While some of that decline can be put down to consolidation in the market and the creation of very large credit unions designed to compete with the high street banks, it’s clear that this relatively young financial sector has not boomed in the way that many economic commentators had been expecting.

UK credit unions

Some analysts are now painting an even bleaker picture for credit unions. These institutions have two arms that support each other – savings and loans. The capital placed on deposit by union members is used to lend to borrowers while the interest generated on loan repayments supports that paid to savers.

But the income that credit unions are generating from loans is also in decline. Since 2005, the income generated on loans issued by the UK’s credit unions has fallen. Also, loans as a percentage of union assets have declined from 73% to 56%. This fall in income from loan interest could have some major repercussions on the ability of unions to attract savers and so have a potentially serious effect on the long-term viability of credit unions.

Furthermore, while credit unions often market themselves as ‘safe’ places to borrow, the number of their borrowers experiencing financial difficulty is also increasing.  In England and Northern Ireland, the number of credit union borrowers in arrears has quadrupled since 2004 and doubled since 2007.

So, in the face of these problems, does it make sense to borrow from a credit union. Do the benefits of this alternative form of finance outweigh the negatives?

Pros of borrowing from a credit union

  • Loans are limited by law to 26.8% APR when the outstanding balance is being reduced.
  • These types of loans are often cheaper than borrowing on a credit card or an overdraft at your bank
  • Credit unions are based in the community that you live in
  • Because credit unions have greater flexibility than the major banks, you may well be able to find a loan with them even if you have a poor credit record
  • Credit unions often provide financial advice to borrowers to ensure that they can manage their budgets.

Cons of borrowing from a credit union

  • Credit unions are based on their geographical location which means that if you live just outside an area where one is based, you may be turned down for credit.
  • Some credit unions only offer accounts to people who fit pretty strict criteria like being a member of a particular organisation, somebody who attends a particular church or someone who works in a particular industry
  • Borrowers very often have to become savers with a credit union before they can apply for a loan
  • Because of their geographical basis, credit unions have few branches, rarely offer ATMs and often have fairly limited online banking systems
  • The number of loan products offered can be fairly limited
  • It can be hard to compare the exact interest rates charged by different credit unions on various loan products
  • Credit unions aren’t very convenient – they are usually open for shorter hours than the major banks or online financial institutions
  • The era of record low interest rates means that credit unions have struggled to match the rates offered by many of the high street banks
  • Very often, the size of the loan that a credit union is prepared to offer you is a multiple of the value of the shares that you hold as a member of the union. Some will insist that you have a substantial track record of saving or buying shares in your credit union which can make it difficult for you to get a larger loan
  • Some will insist that you continue to save with the union after you take out a loan which can place an additional cost on you on top of the loan interest.

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