Credit Unions for Dummies
- 4 days ago
- 6 min read
The complete guide to credit unions
Think of a credit union as a club. There is a money pot that all the club members save money in collectively. Let's say one member used their savings but need more money to sort themselves out. The credit union lends the member but collects interest on the loan.
Why collect interest? The club pot is protected by law. Securely kept and that costs the club money. Someone has to run the saving and lending records, that also costs the club money. The physical place where all the club operations are held is not free either.
Someone has to pay for all expenses and that is the club member who borrows. That is fair because the operational costs for the club includes legal requirements, digital operations and staff to run the operations. The savers and borrowers are all protected by law. It is the interest rate that keeps the "not-for-profit" club running.
Small loans are expensive via any organisation
Banks charge interest based on credit score, and mostly decline people with low credit score, charge probably the double for someone with no credit score, but the one who gets away with it is the one with excellent credit score. The bank just don't trust people with low scores no matter the individual background story.
Payday Loans "specialise" in "Bad Credit" loans, but they charge a huge premium for the risk they take on. Their APR is somewhere between 60% to over 1,000% APR + admin fees. for example. a typical loan of £700 over 6 months could end up paying back around £1,179. That is £479 in interest. The trap people fall into is their very fast action, (money in minutes), but the high repayments can make it hard to pay other bills the following month.
Credit unions interest rates
The maximum interest a credit union can charge is 3% per month. Usually no other fees whatsoever on loans. Not even late or early payment, nor becoming a member int he first place. The 3% interest per month is 42.6% APR per year.
Who "borrows" from credit unions?
To get to that, let's look at the bad numbers first.
1 in 5 adults (11 million people) consider themselves financially vulnerable and struggle to access mainstream credit (TransUnion UK). Most likely can turn to their local credit unions for help and many are accepted. However, the credit unions are regulated and have restrictions too, such as rejecting certain adults for being bankrupt or their affordability is too low. Still, CU accepts many financially vulnerable adults.
About 1 in 3 adults (over 20 million) are now defined as "under-served," meaning they find it difficult to get credit from high-street lenders (Totally Money). It means they get automatically rejected for their low credit scores. Credit unions help them usually but after checking their affordability instead.
Lancashire County Council:
That was the national numbers. As a credit union in Lancashire, let's look at Lancashire County Council figures: Across our region—from the coast of Blackpool to the heart of Preston—over 550,000 local people are currently locked out of fair banking. That is more than half a million neighbours who might feel forced toward high-interest payday loans just to cover a £700 emergency. That's when credit unions are their best friend. The council though promotes saving first! If not enough saved, go credit union first!
Credit unions work with councils
Each credit union has partnered with at least one council to deliver financial support to their residents:
Blackpool Council: The Financial Inclusion Lead
Blackpool has one of the most proactive financial inclusion teams in the country because of the high demand for support in the town.
What they say: The council views credit unions like CLEVR Money as the first line of defence against illegal money lenders (loan sharks) and high-cost payday loans.
What they do: They have a dedicated Financial Inclusion Strategy. If you contact the council for help with bills, they won't just give you a one-off grant; they will often help signpost you to your local credit union. They want residents to move from "crisis borrowing" to "affordable borrowing" where a portion of the loan repayment goes back into a savings account for the future.
Wyre’s approach is heavily focused on making the borough "safe and supported."
What they say: In their 2026/27 budget, they’ve highlighted that financial inclusion is key to "transforming lives." They believe that when a resident is "financially included," a sudden expense (like a broken boiler) becomes a "manageable obstacle" rather than a disaster.
What they do: They invest heavily in Household Support Funds and Crisis Resilience Funds. Their guidance specifically recommends using credit unions to avoid "problem debt." They are also working on making financial products more accessible for "under-served" groups in the more rural parts of the borough.
Fylde Council focuses on long-term stability and preventing people from falling into debt traps.
What they say: Their "Cost of Living Support" guidance is very clear: they do not cover debts incurred by high-cost loans or credit cards. Instead, they urge residents to seek "Welfare Benefits and Debt Advice" early.
What they do: They partner with local organisations to provide "Multiply" support—a programme that helps residents with their math and budgeting skills. Part of this training includes showing residents how much they can save by switching from a high-interest lender to a credit union.
Preston is famous for its Community Wealth Building strategy (the "Preston Model").
What they say: The council believes wealth should stay in the city rather than flowing out to global banks. They explicitly encourage residents and council staff to "spend local and save local."
What they do: They actively promote credit unions as part of their workforce strategy. They want employees to save directly from their pay checks into credit unions to build financial resilience. They also host "pop-up" credit union sessions in community hubs like Larches and Farringdon Park to make sure help is available right on your doorstep.
That's for CLEVR Money. Other councils communicate with other local credit unions based on location.
What's the catch with credit unions?
Does charities and not-for-profits have a catch? Not genuine ones and credit unions are not different. What's different with credit unions is that they are financially regulated by the same authority that regulates banks and payday loans.
With credit unions, you get your second chance. Use it wisely. If you think you can become a member and keep taking loans and not paying back, NO, you knocked the wrong door! Not paying back drives your credit score to even worse level, lock yourself out even more and end up isolated with more debts.
Again, what's the catch? Every member is required to save when paying back the loan they borrowed. It means part of the paid back amount is set in the member's saving account, under full control of the member to withdraw for any reason. This means, once the loan is paid back, the member succeeded to build a saving pot to use in emergencies rather than relaying on another loan. Also, by paying back in time, the credit score may improve.
Credit unions offer what banks and payday loans don't
Every case is unique. Some loans based on affordability (no credit check)
Set you up for saving to help you borrow less or never again
Top up your loan with same conditions and same interest for same period of time
No admin fees usually
Free membership
Dividends calculated every year when the interest collected is more than the expenses.
How did we end up having credit unions?
The concept was created around 140 years ago to create a community between less fortunate to be able to help each other and not relying on the debt from the wealthy who usually ended up taking over their little properties and they would be enslaved, in our modern terms. The ideology and concept grew to other communities and it made a change. Now, credit unions are everywhere in Europe and America.
I haven't heard of credit unions before!
Credit unions today do not have a huge budget for marketing like banks and payday loans, they prefer to reinvest in the community and if possible repay members with dividends when available. This means most credit unions are known for the locals which is the community they serve. Some credit unions (smaller ones) rely on volunteers too.
The interest rate 42.6% is very high
It is not. 3% per month for 1 year is not bad. For a £700 Family Loan repaid for 1 year, that is £143.83. This amount covers a year of operational expenses for the credit union. That rate and repayment schedule was crafted carefully by specialised professionals within the financial industry to secure a fair payback to the credit union, help more people in need and also tells the borrowers that saving is more profitable than lending.
Stop relying on charities
Credit unions help members to start relying on their own resources. Charities are trying to help everyone and sometimes they have shortages and when people who can start relying on their own resources to help themselves, that takes the pressure off the charities.
Learning to be independent is a valuable skill.
