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Are Credit Unions An Alternative To Payday Loans?

Whilst payday loans are a relatively recent financial product in the United Kingdom, credit unions have been in existence since the 1960s. Offering a range of services to their members including current accounts, savings accounts and loans, they are often lauded as an alternative to payday loans. We take a look at credit unions, what they are and whether they do offer a genuine alternative to payday loans.

What Are Credit Unions?

Credit unions are financial co-operatives that are owned and run by its members. They generally exist in specific geographic areas and communities where all the members have a common bond. This could be all living in the same town or housing estate or it may be a credit union where the common bond is that all members are employed by a particular organisation. Most credit unions provide current accounts, savings accounts and loans for their members.

How Do Credit Unions Work?

Credit unions are quite simple in how they work. The members of the credit union save regularly together to build up a pool of money. Members can then apply for a loan from the credit union’s pool of money when they need it and are required to repay it back just like a bank loan. Interest rates are generally quite good thanks to their co-operative status.

How Do They Differ From a Bank?

Essentially, they are different because credit unions are owned by the members and run by the members. That means that there are no call centres or fancy websites. Users deal with real people from their own local community. Unlike banks that are there to make a profit for their shareholders, any excess income from credit unions are returned to the members.

Are Credit Unions a Good Alternative to Payday Loans?

Credit unions have been cited as being a good alternative to payday loans. This is because people can apply for small loans of up to £500 at a lower interest rate than they may get from a payday loan provider. But a closer inspection of the situation reveals that generally credit unions are generally not a good alternative to payday loans. This is for three main reasons:

  • They are not instantly accessible: The big difference between payday loans and credit union loans is that payday loans are instantly accessible whereas generally credit union loans are not. Most credit unions require people to have saved with them for six months before they are allowed to borrow money. This is impractical for most people who use payday loans who need money fast.
  • They may be more difficult to get: There is a direct correlation between interest rates and credit scores. Generally, the poorer the credit score, the higher the interest rate you will be required to pay from a bank or payday lender. Because credit unions have quite low interest rates, the lending criteria may be more stringent than people expect.
  • They are not as private as payday loans: Sometimes people want to borrow money anonymously. They may not want other people to know they are in debt for example or need to take out an emergency loan. Privacy is not a problem with online payday loans but many people may not be too keen on taking out a credit union loan as they are run by other members of the community.

Credit unions can be an alternative to payday loans but in most situations that people require payday loans, they simply are not suitable.

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