Top savings account paying 3% – can you get it?

Credit unions offer a community-funded alternative to the banking giants. When it comes to savings, some of their rates can be hard to beat. Read on to find out who qualifies to save – or borrow – from a credit union in the UK.

Top savings account pays 3%

A new savings account offers to pay a whopping 3% over one year. As a point of comparison, the current 'best buy' one-year fixed-rate account pays just over half that at 1.55%.

While that rate can be matched – or even beat – by certain current accounts (as you're no doubt sick of hearing us talking about), this particular account allows you to deposit up to £15,000.

That's miles above what you can save with the Nationwide Flex (£2,500) or TSB Classic Plus (£1,500) current accounts.

As always, there's a catch: the product is offered by retailCURE, a credit union that is only open to the 4.5 million people who work in the retail industry. Everyone else will have to look elsewhere for a home for their savings.

But what the deal does highlight is the growing competitiveness of credit unions as a whole, and if you are fed up with the antics of big banks, they provide a more community-based option for banking.

In the rest of this guide, we'll run through how these unions work, who they're suitable for, how you can sign up, and any potential drawbacks.

Alternately, you can view your high street banking options here. Some of the offers are pretty decent, honest!

How to save with a credit union

Credit unions can't exist without cash coming in. If you just want to save some money that will then be made available to other members via loans, you can.

Until 2013, credit unions couldn't pay interest on savings. Instead, they paid a dividend once a year, typically around 2-3%, although some credit unions pay more. That has now changed.

If you're looking for a good return on your savings alone, credit unions are not always the best bet. But if you want to put a small amount of money away, perhaps for Christmas, and help people in your local community then you should definitely consider them.

Some credit unions now also offer Cash ISAs.

All savings with credit unions are covered by the Financial Services Compensation Scheme up to a limit of £85,000, although most credit unions will have a maximum savings limit well below that amount.

Many credit unions allow you to pay into your account via a deduction from your salary. You might also be able to pay money in at local shops, libraries and council offices.

How to borrow from a credit union

If instead you need to borrow some extra cash and you're having trouble getting hold of a 0% credit card or loan from a high street bank or building society, you should definitely take a look at what your local credit union has to offer.

You should be aware up front that you will have needed to have saved some money with the credit union, generally over a few months, before you can apply for a loan. So this isn't a quick fix if you need some cash in a hurry.

How much you can borrow will usually depend on how much you've saved over that time. It's usually three or four times the amount you've saved.

You can usually borrow far less than you can from a bank or building society, sometimes as little as £100.

The annual interest rate is likely to be anything from 10% to 25%, higher than many personal loans, but bear in mind that you can't actually borrow less than £5,000 on most personal loans.

That figure is also lower than many credit cards and significantly lower than a payday loan.

If you're a homeowner you could take out a secured loan, but this puts your home at risk if you fall behind with your repayments. A credit union loan is not secured against your home.

By law, a credit union can't charge you more than an annual interest rate of 26.8%. They also don't charge any penalties for early repayment.

Most credit unions will be upfront about the cost of the loan and won't even talk about it in terms of interest rates.

Sign up to loveMONEY's email newsletter for a chance to win £500 EVERY WEEK!