When Are Credit Union Loans A Good Deal?
When you are looking for a retail loan to buy a home, buy a car, or pay for college, it’s worth looking at getting a credit union loan. Credit unions compete with banks but are organized differently. Sometimes the differences can mean a better loan rate for you.
What Is A Credit Union?
A credit union is a non-profit organization that provides savings, credit, and other financial services to its members. The members of a credit union have a something in common. What the members have in common can vary from one credit union to another. It might be a common employer, a shared geographic location, or belonging to an organization.
A credit union is also known as a credit union bank because it functions in a similar manner.
Because a credit union is not for profit, the income it receives must go back to its members. That means the money that the credit union makes must be invested in services for its members, higher interest on member savings, or lower interest rates on loans to members.
Credit unions only serve members, so you must join a credit union in order to use its services. Typically, this means buying at least one share — usually $5 to $25 — to get started. “Buying a share” often means putting money in a savings account and leaving it there for as long as you belong to the credit union.
Why Would I Get A Loan Through A Credit Union Instead Of A Bank?
Because a credit union is a non-profit organization owned together by all of its members, credit unions generally offer better rates on loans than banks do. The income a bank earns must go to its shareholders. Banks do not return income to customers in the form of lower interest rates on loans.
Convenient locations is one reason some people prefer banks to credit unions. Recently credit unions have become very widely used and more accessible to people across the country. However, since banks are larger they tend to have many branch offices in different locations. For the purpose of taking out and paying off a loan, the location of a branch office might not matter much. You could join a credit union so that you can get a loan, but keep your checking account at a bank.
Interest rates on loans vary from one credit union to another, but information on the national averages shows why joining a credit union might be worthwhile.
According to the National Credit Union Administration, the national average loan rates for credit unions in December 2014 varied significantly.
Here are some examples:
- A 60-month (5-year) loan for a new car: 2.74% at credit unions vs. 4.89% at banks.
- A 48-month (4-year) loan for a used car: 2.83% at credit unions vs. 5.30% at banks.
- 30-year fixed rate mortgage: 4.05% at credit unions vs. 4.08% at banks.
- Unsecured 36-month fixed term (personal) loan: 9.39% at credit unions vs. 10.41% at banks – Source: http://www.ncua.gov/
You have probably noticed that the difference in loan rates is much higher for car loans than for long-term mortgages. The benefits of working through a credit union are more significant for some kinds of borrowing than for others.
What Do People Say About Credit Union Loans?
Clark Howard, a respected consumer expert, describes some creative mortgage options he has seen credit unions provide, especially adjustable rate mortgages. He suggests that credit unions want you to pay off the debt, but that banks are motivated to keep you in debt. He says that credit unions put effort into designing mortgages to benefit borrowers and help you to get debt free. He says that banks, on the other hand, would like for you to keep paying the bank forever.
Many consumers are devoted to credit unions because they have had consistently good experiences with them. One commenter wrote on Bargaineering.com that although her father was the vice-president at a major corporate bank and “hated credit unions,” she has been a credit union customer for twenty years because the loan rates are so good!
What Types Of Loans Are Available Through Credit Unions?
Credit unions generally offer all the same types of loans that banks offer.
Mortgage Loans: A mortgage loan is money borrowed in order to buy a house. Your house is the collateral, or security, for the loan. The value of the mortgage must be less than the value of your home when you take out the loan. Mortgage loans come in many forms.
The most common type of mortgage is the 30- or 15-year fixed rate mortgage, in which an interest rate is set when the money is borrowed and it remains the same for the life of the loan. There are also adjustable rate mortgages (ARMs) in different terms. An ARM starts out at one interest rate, and then the interest rate resets at a pre-determined time. ARMs are the type of loan Clark Howard discussed when he said that some credit unions offer innovative products that benefit borrowers.
Home Equity Loans: A home equity loan is money borrowed against the value in your house. This type of loan is often used to pay for home improvements. The collateral for the loan is the equity, or already-paid-value, in your home.
Auto Loans: A credit union auto loan is available for the purchase of used or new cars, trucks, and other vehicles. The collateral for the loan is the vehicle itself. So this doesn’t differ too much from other car loans at a bank.
Student Loans: Credit union student loans are available for paying costs associated with education. College students qualify for loans with special rates and terms that accommodate the needs of school. Since a college education is a long-term investment and students must pay tuition for several years before they begin earning money, student loans usually do not accrue interest until after graduation.
Unsecured Loans & Personal Loans: Unsecured loans are personal loans and have no collateral. This is the riskiest type of loan because there is nothing to back it up, like a house or a car that the credit union can take possession of if the loan is not paid. This type of loan might be easier to get at a credit union than a bank because each credit union has fewer customers than a corporate bank. Also, personal relationships are often part of the culture of a credit union. The interest rate on a credit union personal loan is, on average, lower than at a bank. At either type of lending institution personal loans are more expensive than secured loans.
Credit unions have much to offer if you are seeking a loan. The philosophy of a credit union — to benefit members — and the data showing credit unions consistently offer better loan rates both suggest that when you are ready to borrow, you should take a look at credit unions.