These days there are lots of ways to borrow cash. You can go to a payday lender (if it’s an emergency), get a personal loan or obtain credit facilities from a credit union. But what are the pros and cons of using a credit union? This article tells you how credit unions work and discuss them in comparison to payday loan lenders.
Credit unions: what are they?
Credit unions are financial co-operatives, which means they are owned by the people who use them. Credit unions will generally be restricted in terms of their members to people who live and work in its immediate vicinity. People living far away from their preferred credit union may wish to consider other financing options for a personal loan like approaching a reputable lender such as Wonga, Barclays, the Halifax or Lloyd’s.
How do credit unions work?
Credit unions encourage their members to save money rather than borrow. They have a whole range of ways to facilitate money savings and these are unique to the credit union. For example, members are encouraged to save money by setting up direct debit savings and by depositing their money at various collection points. When a credit union does lend money, the amount of money will generally be limited, but the upside is that credit unions offer an extremely low rate of interest on loans compared to most of their commercial counterparts.
Credit unions are one of the safest places to invest your money, since they are protected under the Financial Services Compensation Scheme. This means that savers with £85,000 in savings or less don’t lose out if the credit union hits financial problems.
The downside of the credit union should not be ignored though. Many credit unions exclude people simply because of where they live, making postcode lotteries a reality in the UK. Credit unions typically will only lend smaller amounts of money, so if you want to take a bigger risk and get more cash, then the credit union might not be for you. Credit unions don’t really have the funds to compete with commercial counterparts, who offer quick online application facilities and even same day or next day loan facilities. For some therefore, although the principle of a credit union appears attractive, the reality can be very different with money difficult to access and procedures surrounding applications lengthy and protracted. Additionally, commercial counterparts tend to lend people more money, based on an assessment of their financial circumstances alone, and not on where they live. As such, credit unions have been criticized as being archaic and restrictive. People who turn to credit unions are often disappointed in the amount of money they can borrow and the range of products and services open to them as members.
Credit unions, the future?
So, are credit unions a thing of the past? To some, it would certainly appear so, although recent government policy which aims to revamp the relevance of the credit union are being put into action by the Coalition government. Whether these policies will improve flexibility of the credit union remains to be seen though.