Loan sharks, beware! (Credit Unions)

Member Name: weetoon

Product:	Credit Unions
Date:	21/02/06 (810 review reads)
Rating:

Advantages: Cheap loans, democratic .

Disadvantages: Not available everywhere (but you could always start your own) .

I have been a member of my local Credit Union since it started, about 10 years ago. In fact, I am proud to say that I am Member number 31! Although Credit Unions all have points in common, there are also differences so I will start with a general look at Credit Unions, before looking at my own experience.

~What is it?~
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A Credit Union is basically a financial cooperative, owned and controlled by its members. They offer affordable loans and encourage members to save. They are run by a volunteer board of directors democratically elected by members. Anyone can join, as long as they are part of the 'common bond'. This could be people living in a shared area, working for the same employer or belonging to the same association. This is a very important concept in the Credit Union system, and I will come back to it. Important too is the 'not for profit' ethos, particularly when we hear of banks announcing record profits all the time, but still happy to raise charges for customers and to pay their workers badly. Therefore Credit Unions do not discriminate on the grounds of earnings or residence when awarding loans. They are also happy to welcome savers, no matter how much (or how little) they save.


~History~
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The principles and ideals that underpin the credit Union concept follow the industrial revolution and the cooperative movement closely. The movement started in Canada and the States where it became an influence for the rest of the world. In Ireland, a Credit Union was founded in 1958 by a schoolteacher and her colleagues and it was to be the first of many there. It took much longer for the movement to start in England, Scotland and Wales. I'll talk about Scotland here because I know more about that, but I would guess the history is much the same in the rest of the UK. In Scotland, then it all started in 1970, under the impetus of an unemployed painter and decorator, Bert Mullen, who founded the Western Credit Union in the deprived area of Drumchapel. After that, nothing much happened until the 1980s where an upsurge took place, to get to today's membership of 125,000 in over 120 Credit Unions. The worldwide membership is 118 millions, in 40,258 Credit Unions, in 79 countries. Some countries like the USA and Australia count 30% of the population as members, whilst in Ireland, this figure reaches a staggering 50%.


~Saving~
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In these times of easy credit and cheap (relatively) interest rates, where we are encouraged to borrow and 'flex that plastic' all the time, Credit Unions go against the grain a little, as they actually encourage people to save. This is made easy by setting up local collection points and allowing members to pay directly from their wages. This I believe is a great way to save, particularly if money is tight, as you never actually get the money and are therefore less likely to miss it. The dividend paid to members varies, according to the size of the Credit Union, and the amount of reserve they have. My Credit Union is not actually big enough to pay dividends, but some of the bigger ones give their members as much as 8% on their savings, a handsome return I'm sure you'll agree. For those of you for whom investing ethically is important, it is worth noting that all the money you save up will be used locally to provide loans for the other members who are neighbours or colleagues.


~Borrowing~
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When you are on a low income, it is very difficult to get credit. And yet, most of us could not manage certain purchases outright, even if we get a decent wage. There have been reports of entire streets unable to get credit, due to the credit history of a few of its inhabitants. This of course makes loan sharks very happy. They will lend to anyone, but the cost of borrowing from them is usually exorbitant. Some people, who have no choice but to borrow money in this way, find themselves in appalling situations. Very recently in the news, there was a story of such a loan shark, who was charging 150 to 200% interest for loans and tried to force his 'clients' to pay back using threats of violence, sexual intimidation and physical assault, even on pregnant women. This is where the Credit Union offers a real alternative. By law, the maximum a Credit Union can charge is 12.7%. This is charged on an ever reducing balance, which means that every week or month, you will pay less and less interest. Many Credit Union's rate is even lower. There are no hidden charges and you do not get penalised for repaying the loan early. As an experiment, I used the loan calculator provided on the ABCUL website to calculate the cost of a £1000 loan over 2 years and compared it with the Royal Bank of Scotland (my own bank, and one which made record profits last year).

Royal Bank of Scotland
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APR: 15.6%
Total Monthly repayment: £54.56
Monthly Insurance Loan Repayment: £6.28
Total Loan Insurance: £130
Total Payable including Loan Insurance: £1,309.44

Credit Union
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APR: 12.7%
Free Insurance with the loan (member's benefit)
Total Monthly Repayments: £47.07
Total Repayment: £ 1,129.76


The total amount you can borrow is based on ability to repay the loan (now, that is sensible but it seems banks have forgotten this rule). In my Credit Union, you can borrow up to two and a half times the value of your shares (savings). Members are encouraged to continue saving whilst repaying their loan, which means their savings will have grown by the time they have finished repaying their loan.


~Volunteering~
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Credit Unions are run by volunteers. Ideally these should have excellent people skills, a basic knowledge of accounts and some knowledge of Credit Unions, but full training is given to all the volunteers. People who volunteer to work in their Credit Union will be helping their local community and acquiring many relevant, transferable skills. A volunteer's job in a Credit Union can often be a first step towards entering or re-entering the job market, as it builds confidence as well as skills.


~Benefits~
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To its members, a Credit Union offers motivation for saving and affordable loans. It also offers free life insurance as your relatives get double the value of your share in the event of your death and any loan is paid off. It is a very ethical (sometimes profitable, sometimes not) way of saving which benefits your local community. Credit Unions can tailor their services to suit an individual's circumstances.

To the wider community, a Credit Union improves the general financial knowledge of its member and offers training to its volunteers. It invests local money locally and helps restore a sense of pride in disadvantaged and disaffected communities. It provides means of targeting financial exclusion, identified by the government as one of the principal aspects of a cycle of deprivation. Bigger Credit Unions also employ paid staff.


~My experience~
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When I look at my saving books (I'm on my second one), I feel like I am looking back at a little bit of my history, retracing fortunes and misfortunes and changing circumstances. Although my situation has changed enormously in the last few years and is no longer precarious, I still take out the odd loan. It is cheaper than borrowing from a bank. And I try and save a little, as much to build a modest egg-nest as to be involved in the Credit Union. After all, their motto is "people helping people".


~references~
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http://www.abcul.org/page/index.cfm
http://news.bbc.co.uk/1/hi/england/hereford/worcs /4734022.stm
Leaflets from my local Credit Union

Summary: People helping people to affordable loans