Credit Unions

Mention the union movement to many interest-hungry investors and it conjures up unwelcome images of Arthur Scargill and ranks of workers singing the Internationale. But there is one type of union offering some of the cheapest personal loans and best savings rates around.

Credit unions are community-based organisations which consist of groups of people who chip money into a pool from which they can take loans at bank-beating costs.

Also, being run by mostly voluntary staff on a not-for-profit basis, any surplus at the end of the year can be returned to members as an annual dividend.

This can be as much as 8 per cent of members' savings, which are held in the form of shares in the union.

Free life assurance

In addition, credit unions provide free life assurance and will pay off loans up to a certain limit in the event of the borrower's death.

The minimum saving is generally only £1 and there is no credit check to pick up previous blots on your financial copybook.

These are just some of the reasons why credit unions are to form a central plank in the Government's recently announced plans to make financial services accessible to poorer communities.

So how do they sift out the good borrowers from the bad?

The essential principle is that people will not do a runner with their chums' dosh.

How to join

To join a credit union, you have to be part of a group of people with shared interests.

Typically this can be residence in the same town, village or housing estate, membership of a trade union or church or employment at a company.

Members are encouraged to play a part in running the organisation, turning up to meetings and social events or even standing for election to office.

But there is more to it than just this link, known in the jargon as the Common Bond.

Strict criteria

There is strict criteria on how much money you can spend relative to the amount you save.

The union will generally only lend you two or three times your savings.

Also, when a loan is taken out, borrowers agree not only the instalments for repaying the sum, but pledge to pay a regular amount to their savings in the union. This could be as little as £1 a week.

In most community unions, members can start borrowing after three months if they have demonstrated their ability to save.

Regular savings