The Pros And Cons Of Credit Union Saving and Borrowing

4th July 2025

Many people want to save and help their community by making funds available at good rates from a local entity such as Hi-Scot Credit Union that covers Highland and Islands. Credit Unions encourage savings as well as offering affordable borrowing but lets take a closer look.

Are Credit Union Savings Good Value?

How Credit Union Savings Work
Credit unions pool members' deposits to offer loans and pay an annual "dividend" rather than a fixed interest rate. The size of your dividend varies according to the credit union's annual surplus, not a guaranteed rate.

Funds in credit union savings accounts are covered by the Financial Services Compensation Scheme up to £85,000 per person, per institution. However, many credit unions cap individual savings at around £10,000-£15,000 to manage their lending balance sheets.

Pros of Credit Union Savings
Dividend rates can sometimes out-perform basic high-street savings accounts. Some unions have paid dividends of 2-3% or more, compared to typical bank interest of around 1.5%.

Community focus and member-owned structure mean surplus earnings are reinvested or shared, not paid to external shareholders.

Multiple ways to save—payroll deduction, standing order, local collection points—help establish a regular savings habit.

No account-keeping fees at most credit unions, and savings grow free of income tax until you exceed your Personal Savings Allowance.

Full FSCS protection ensures your money is as safe as in any UK-regulated bank or building society.

Cons of Credit Union Savings
Dividend is discretionary and can be zero in lean years. You lack certainty over your effective rate of return compared with fixed-rate products.

Access restrictions vary: some notice periods, limited ATM or online access, and fewer branch locations than high-street banks.

Savings caps (usually £10k-£15k) may restrict how much you can hold in one union, forcing you to spread across multiple providers if you have larger balances.

Dividend yields can lag behind top-market fixed bonds, Cash ISAs or bonus-rate accounts, especially in a rising-rate environment.

Who Benefits Most?
Credit union savings accounts suit savers who value community engagement, flexible deposit methods, and the safety of FSCS cover—particularly those who struggle to secure a standard bank account or want to build disciplined savings via payroll. If you need a predictable rate and maximum returns, compare guaranteed-rate ISAs or fixed-term bonds alongside credit union dividends.

How widespread are credit unions in the UK
As of July 2025, there are 512 credit unions operating across the United Kingdom.

Credit Union Membership is Growing
As of the end of 2024, credit union membership in Great Britain reached a record 1,575,892 members.

Earlier in Q3 2024, Bank of England figures showed 1,568,726 members—up 4.2% year-on-year.

Value of Free Credit Union Loan Insurance versus Other Lenders

What Credit Unions Typically Provide
Loan Protection Insurance is included at no extra cost when you borrow.

Pays off all or part of your outstanding balance if you die before your loan is repaid.

Cover limits generally up to £5,000-£10,000 per member, with age caps (often up to 69 years old) and certain health exclusions3.

Underwritten by specialist insurers (e.g. Sterling Life, Maiden Life) and managed through group policies to keep member costs down.

Life Savings Protection on your deposits.

Pays a lump sum to your nominated beneficiary if you die, typically 25%-100% of your savings balance (capped at a set limit).

Cost Comparison with Mainstream Lenders
Payment Protection Insurance (PPI) sold by banks and credit card companies is optional and always incurs a premium.

Premiums often add 30p-60p per £100 borrowed each month, depending on the lender and cover levels.

Covers a broader range of events (death, sickness, accident, unemployment), but at a direct cash cost to the borrower.

Credit Union Cover is free, saving you the total premium you would otherwise pay—often several tens or hundreds of pounds per year on typical loans.

How Much You Could Save
Imagine a £5,000 loan over 2 years:

With PPI at 40p per £100/month: 5,000/100 × £0.40 × 24 months = £480 in insurance premiums.

With a Credit Union: £0 in premiums; full death-only cover included.

That's nearly £500 saved—money that stays in your pocket or could reduce your borrowing costs.

When Credit Union Insurance May Fall Short
If you need protection against sickness, accident or unemployment, you'll still need to buy extra cover.

Caps on cover limits and age restrictions can leave high-value borrowers or older members under-insured.

Credit unions vary in their exact terms—always check the small print on caps and exclusions.

Bottom Line
Free loan protection from credit unions delivers real cash savings versus paid-for PPI, especially if your primary concern is repayment on death. But for wider life-event cover you may still need top-up policies—so compare both cost and scope before deciding.

Regular saving can improve your credit rating.

Highland
Check out the Hi-Scot credit union at www.hi-scot.com
Online banking makes it easy to save and borrow vi the web site.