How is a doorstep loan different to a Credit Union?

Doorstep lenders and credit unions may both let you borrow money, but you need to become a member of a credit union first.

To borrow from a credit union, you must be a member of the organisation and potentially have a financial history with it (such as savings) before you can borrow money. With a doorstep loan, you can borrow (subject to affordability) without joining anything and a company representative will come to your home to deliver your cash loan and collect repayments face to face.

As credit unions are local companies, they’re all different. Some require you to repay over a longer term than doorstep loans; it’s unlikely someone will come to your house to collect repayments, and you won’t necessarily get your loan in cash.

Here, we outline how credit unions operate and how they differ from doorstep loans.

What is a credit union?

A credit union is typically a community organisation where members share something in common, such as living in the same area or working in the same industry. Together, members pool their savings and allow other members who share that common bond to borrow out of that pool of money.

There are large and small credit unions across the country, some with thousands of members and some that have far fewer people involved. They are not-for-profit organisations, so any profit they might make is used to improve the service they offer or is given back to members.

Borrowing from a credit union

Credit unions use the money that is held in its savings and current accounts and lend it out to members. The community-based structure of credit unions means they tend to work closely with their members, helping them decide how much they can borrow based on their income and financial history.

Although they may be open to lending to people who can’t get loans from mainstream lenders, not everyone is eligible to join a credit union. Some may require you to have savings with them already before they’ll allow you to borrow money.

While loans will vary based on the organisation, terms of a credit union loan could include:

• Up to 3% interest per month, or 42.6% APR (1% a month cap in Northern Ireland).[1]
• No hidden charges or early repayment penalties.
• Unsecured loans of up to 5 years, secured loans of up to 10 years (sometimes longer).

Depending on the credit union and how it operates, repayments can be made:

• In person at the union’s branch.
• By Direct Debit.
• Directly from your wages, if your employer has a link to the credit union.
• By using a PayPoint card at designated locations.
• Directly from your benefits.

How a doorstep loan is different from a credit union loan

How simple or difficult it is to apply to borrow from a credit union depends on the organisation.

With a doorstep loan, new customers could apply online to borrow low amounts, subject to affordability and the lender’s product range. If you meet all the requirements when a company representative visits you at home they’ll come back on an agreed date to deliver the loan, in cash.

You will make weekly payments directly to the representative, in cash. There may not be fees or penalties for missed repayments, although it depends on the lender and they may recommend you first speak to a representative if you’re struggling to make repayments.

The main differences between a doorstep loan and a credit union loan are:

• Anyone can apply for a doorstep loan, whereas you must be a member of a credit union before you can apply to borrow from them.
• Doorstep loans will be delivered to you in cash. Credit union loans may be paid directly into your bank account, or you may visit your local branch to collect your money.
• With a doorstep loan, a representative will visit you to collect repayments, whereas the payment process may not be as personal with a credit union loan.
• Interest rates on doorstep loans may be higher than those attached to credit union loans.[2]

Some may prefer credit union loans if they are already members and have financial history with a union, while doorstep loans might be preferred by those who aren’t a member of a credit union and struggle to be approved for a loan from traditional lenders.

There are pros and cons of each, which should be considered when you are looking for a suitable loan.

Sources:

[1] Taken from The Money Advice Service – Borrowing from a credit union. Retrieved 9^th Feb, 2018.

[2] Taken from The Money Advice Service – Home credit or doorstep lending. Retrieved Feb 9^th, 2018.

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How is a doorstep loan different to a credit union