Blog: What are credit unions?

Written by Jo Moscrop on behalf of the Greater Manchester Credit Union Consortium

The Enterprising Communities Fund is an investment fund with a difference. It uses money saved by communities to invest in businesses doing social good in those communities, But how?

Of the £4.1 million investment, £2 million will be provided by the Greater Manchester Credit Union Consortium, a network of Greater Manchester-based credit unions working together to provide ethical lending.

But how do credit unions actually work?

Credit unions are not-for-profit financial cooperatives that pool members’ savings to use as loans, and sometimes mortgages. Credit unions have members, not customers, and once you start membership you typically must save monthly to keep your membership active. Membership is what allows you to apply for loans. Credit unions are created by people who have something in common, usually known as a “common bond”. There are two main types of common bonds: geographic and employment. This means you can have a credit union that is only for people who live and work within a particular area (geographic), or people who work within a certain sector (employment). 

As they are not-for-profit, profits are shared with the members each year in the form of a dividend. Dividend rates are usually voted upon at Annual General Meetings and then shared with members shortly after. Dividends vary as they are dependent on how much profit has been made in that particular financial year. 

Unlike banks, credit unions are run for members, by members with the main priority being to support members as opposed to making a profit, as there are no outside shareholders to pay. Although they are run differently to banks, there are some similarities - they too are regulated by the Financial Conduct Authority and covered by the Financial Services Compensation Scheme.

People who have poor credit may typically struggle accessing credit on the high-street, which is where credit unions can sometimes help. As loan decisions are based on affordability rather than credit score, credit unions could be more likely to approve a loan application providing the repayments can be afforded comfortably. Credit unions will try and help all members, no matter their credit history. They focus on promoting thrift and good financial management by encouraging regular savings and only lending money when people can afford to repay.

Would you like to join a credit union? You can find your credit union here.

Are you interested in accessing social investment to grow your social business? You can find out more here.

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