Over the course of the past eighteen months or so, it seems as though there hasn’t been a day gone by where either a specific bank, or the banking sector as a whole has not been in the news headlines, for a variety of reasons, but all of them bad.
The banking sector is currently in turmoil, as years of greed and irresponsible lending policies have finally taken their toll on the sector, with banks making record losses, being taken over by competitors and receiving billions of pounds worth of government bail outs to help write off bad credit loans.
Due to a lack of liquidity, it has become extremely difficult for an individual to obtain funding through a personal loan or homeowner loan, unless they have a perfect credit rating and even if they are accepted for a loan, despite interest rates being at a record low level, the cost of personal finance seems to have increased dramatically, making a cheap loan seem like a thing of the past.
At the same time as this, interest rates for savers and investors have plummeted and many savers are concerned about just how safe and secure their savings actually are in the bank or building society. It seems hardly surprising therefore, that many people have lost faith in banks, both as savers and borrowers and are now looking for an alternative home for their money, or provider for their next personal loan.
But what are the alternatives to the traditional bank or building society route, for someone who has become disillusioned with the system, or is unable to obtain the loan they require?
Credit Unions
One alternative solution for both savers and those looking for a personal loan is a credit union. Credit unions have been around for many years and operate on the principle of a financial co-operative society, existing for the benefit of members and have been growing in popularity over recent years and particularly since the start of the latest banking crisis.
A credit union is owned solely by its members and run by the same people, all of whom must have something in common with each other, such as all working for the same company, living in the same local area, or being members of another group or organisation. The individual members of the credit union invest their own money in the central fund, along with all the other members, which can then be used to offer cheap loans to other members of the union and offer a better return on an individual’s savings than they would ordinarily receive from a typical bank or building society deposit account. This would be paid to the member in the form of a regular dividend, rather than monthly interest.
For someone looking for a small personal loan, a credit union offers a cheap and flexible alternative to their normal bank. One of the rules of a credit union is that the maximum level of interest which can be charged on a loan to a member is capped at 2 per cent per month, but in many cases the actual rate which is charged is much less than this. Repayments are extremely flexible and a borrower is able to take out a loan for just a few months if they so wish and repay all or part of the outstanding balance at any time without incurring penalties.
The important thing to remember about this type of organisation is that, in order to benefit from it, you have to be a member and the credit union is run solely for the benefit of its members, therefore any profits made are returned to those same members in the form of dividends and lower interest rates on loans, unlike banks which are more interested in generating huge profits for their shareholders, at the cost of the ordinary customers.
With regards to saving through a credit union, this too is extremely flexible. It is possible to deposit a lump sum, or make regular savings amount either by direct debit or directly from salary (particularly in the case of credit unions which are run through employers). The money invested is accessible at any time and it is possible to deposit, or withdraw cash as often as you like. Under current legislation, there is no interest payable on savings within a credit union, but a dividend is paid on a yearly basis, based on the interest charged on the loans made by the union.
Clearly the amount of dividend can vary, depending on term and amount invested, but typically it is the region of between 2 and three per cent, but could realistically be as high as 8 per cent. As from May this year, however, credit unions will have the option of paying interest to their members rather than a dividend.
Whether an individual joins a credit union as a saver or a borrower, they are offered a high level of protection automatically through the organisation. For someone taking out a personal loan, the credit union automatically provides free life insurance to the borrower to cover the outstanding balance of the loan. For savers, it is reassuring to know that all credit unions are covered under the Financial Services Compensation Scheme, which means that a person’s money is protected even if the credit union were to close down.
Credit unions have been around for many years and up until recently have often been thought of as out of date. But due to the recent problems in the banking sector they are starting to grow in popularity once more and the government is now becoming involved, with plans to alter the legislation which regulates credit unions, in order to bring them more up to date and make them more appealing and accessible to a wider range of individuals.
One spokesman for the government said “The excellent service provided by Co-operatives and credit unions take place within an outdated legislative framework and overhauling this will be key to achieving a significant expansion of the sector. I want the sector to thrive and grow further, to be widely seen as a genuine alternative to proprietary companies across the country, not stereotyped as “old fashioned” or confined to its Northern roots. This is a vision of credit unions as the modern day equivalent of 18th century “town banks” providing a local, trusted alternative to the national banks on every high street. To achieve this vision means removing barriers to co-operatives competing fairly in the market place and enabling them to bring a greater range of services to a wider range of people.”
Hopefully, new legislation will bring renewed activity and interest in credit unions and not restrict them by imposing too many prescriptive rulings on their activities. Either way, interest continues to grow in these organisations, both for savings and personal loans and it looks as though they will be here to stay for some time, providing a realistic alternative to the traditional bank.
For more information on credit unions, or to find one in your local area, contact the Association of British Credit Unions Ltd.
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