Credit Unions: The Cheaper Alternative?

Obtaining credit has become so common that believing you are at the mercy of ever increasing interest rates and inflated charges from the major banks is common. But what if there was another option? There are alternatives available at your local credit union.

What exactly is a credit union?

A credit union is a profit sharing, financial co-operative run democratically by the members of the union itself. By offering a more financially attractive alternative to the standard products offered by banks, the popularity of the credit union movement is increasing.

As maximizing profits is not the key goal, such an organization has three main aims:

• To encourage its members to save regularly
• To provide loans and financial assistance to its members at the lowest rates of interest possible
• To offer its members help and support, if required, in the management of their financial affairs

How can you join?

To enable you to take advantage of the kind of services that a credit union offers, all you have to do is become a member. Not that this is quite as straightforward as you might imagine…

The key to becoming a member is what is known as the ‘common bond’. The common bond determines your acceptance as a member and this could be that you reside in a specified area, work for a particular employer or within a particular trade, or that you are a member of a certain club or association.

Because of this, credit unions welcome everybody from within the common bond regardless of income, employment status, or age and also – and perhaps more crucially, regardless of your credit rating or if you are unable to save a regular amount. So whether you have a poor credit rating or not you can still become a member and save as little or as much as you like.

Irregular savers are just as welcome as those people who are able to save money on a regular basis and usually all members, receive the same percentage annual dividend on their savings. Whilst generally paid at 2 to 3%, this can be as much as 8% depending on profits.

Using the sum of all members’ savings, the credit union is then able to provide low cost financial services to its members. Although each credit union (as all mutual societies) must ensure that enough money is set aside to ensure financial stability, all other profits go to providing the lowest interest rates for members’ loans whilst returning an attractive rate of interest for its savers.

How are credit unions regulated?

Created by the U.S. Congress in 1970, the National Credit Union Administration is an independent federal agency that insures deposits at federally insured credit unions, protects the members, and charters and regulates federal credit unions.

Also, a given credit union cannot lend all the money saved as loans to its members and cannot invest any residual money in any ventures above a certain level of risk. To reduce the risk of bad investment and to ensure that all savers’ money will not be tied up for long periods of time, any money in the control of the credit union must be put into bank deposit accounts, government bonds or other reliable investments.

Overall, credit unions offer an easy and convenient way to save and borrow and can provide a focal point for a community by bringing people together, to both help each other and to help the community as a whole. They can also help to revive the economy of a local area as more money stays within the community which has a knock on effect on income for local businesses.

All you have to do is prove that you can save before applying for a loan. A loan will be offered but once proven, financial assistance will be offered based on how much you can save or tailored to your individual circumstances. Paying into a credit union is also easy and can be done at local shops, convenient collection points, or can even be set to transfer directly from your salary.

Are credit unions right for everyone?

So is becoming a member of a credit union right for everyone? Before considering them it is worthwhile bearing the following points in mind:

· Regardless of which credit union offers you the best option, you cannot simply join whichever one you want. You have to fulfill the requirements of the common bond or at the very least, be a close family relation of someone that does and who is already a member.

· Credit unions are not just a means of obtaining cheaper loans. Although there is no fixed rule, generally you have to have saved with them before any assistance is offered and proved yourself to be able to save.

· They may not provide the convenience of the high street banks as there will typically be very few or sometimes no ATMs and few branch offices.

· Credit unions may not offer the range of services that you can get from your local bank so check to see what is on offer before you commit. Other services such as the return of cancelled checks etc. may also not be provided. It may be worth retaining an account at your bank alongside membership.

· All money borrowed from or saved with must be in the name of a member and as such, no money can be borrowed in the name of your business. Even if you need money for your business you still need to borrow money in the manner of a standard member of the credit union.