Credit unions, classified as a financial institution, offer traditional banking services such as savings and, of course, credit products. Whether you need cash for an auto loan, student loan, or emergency expenses, a personal loan from a credit union is a viable financial source. Most borrowers prefer to apply for credit union loans because they impose lower interest rates and have less stringent requirements.
That said, in this post, you’ll learn how a credit union loan works and why it can be a viable lending solution to fulfill your financial needs.
What Is A Credit Union?
These financial institutions are different from banks in that their strength comes from their members. Often, these individuals share a common attribute—they may work for the same organization or live in the same community.
Credit union members pool their money by purchasing shares in a cooperative. Collective funds from members are then used to offer credit union loans, savings, and other financial services to existing members. Like banks, credit unions hold deposits, issue checks, offer investment services, and have automatic teller machine (ATM) cards. But that’s where the similarity ends.
Banks are foremost for-profit institutions, meaning they aim to make money from these services and in re-investing their earnings. High interest ratesare commonplace for loan products from these financial organizations.On the other hand, credit unions are not-for-profit. Any income generated from the minimal loan interest rates are paid out as dividends to members or invested back to the organization.
According to the World Council of Credit Unions (WOCCU), there are over 46,000 credit unions globally, with nearly 172 million members. In the Unites States, about 90 million Americans are credit union members who’ve pooled together at least USD$615 billion in savings.
How Do Credit Union Loans Work?
These types of loans work the same way as if you’re lending from the bank—minus the high interests and flexible loan payment amortizations. Instead of the bank, your lender is the credit union, of which you should be a member. To give you an idea, here’s how credit union loans work:
1. You Need To Be A Member To Access A Loan Product
As mentioned, credit union members share a common trait. They can be members of an organization, an employees’ union, a homeowners’ association, parents, church members, and so on. Before being allowed to access a particular loan, you must become a member of the organization, ideally of good standing.
In some cases, you may need to have a co-signer. In a traditional bank loan, this person is also called a loan guarantor. This person must have a favorable credit score and ideally must be financially sound. The co-signer may be asked to pay for the loan in case the borrower defaults on payment.
2. Loan Products Vary
Credit unions vary in size too. Thus, different organizations offer different types of financial and loan products. Some bigger credit unions offer a wider range of services, including home mortgage loans, auto and personal loans, and credit cards.
The loans lent out to members come from the pooled resources of all members. This cumulative amount is used for operational expenses, loan interest rebates, and dividends to the members. Some credit unions offer secured loans, especially if a high amount of cash is involved. In a secured loan, a borrower has to raise a collateral—any valuable material asset such as jewelry, a vehicle or a home—which the credit union may possess in case of non-payment.
3. Credit Union Loan Interests Are Cheaper
Unlike banks, credit unions aren’t obliged to pay federal taxes; that’s why they can impose lower interest rates to their memberborrowers.Additionally, as a not-for-profit organization, credit unions want to ensure financial instability among its members. With these types of credit, you’ll get great deals and flexible terms.
For instance, most credit unions charge annual percentage rates (APR) lower than 18%. In fact, the National Credit Union Administration (NCUA) states that the average three-year unsecured loan APR was only about 9.22%.Comparatively, online lenders could impose as high as 36% APR. Additionally, traditional loan borrowers may have to prepare a few hundred dollars for various types of fees such as origination fees, processing fees, credit check fees, among other upfront costs.
4. Credit Union Loan Requirements Are Less Restrictive
As with banks, credit unions will screen you and your payment history by checking your credit score. If you have a score of 650 or more, you’d probably have access to loan products with attractive rates.
If you’ve struggled with loan payments in the past, you’ll likely be rejected by banks. Fortunately, credit unions have less stringent rules and are still willing to work with borrowers who have low credit scores. Even members who don’t have a credit history may be approved for a particular credit union loan.
Credit unions work like banks, but they’re more favorable in that they offer flexible loan terms, and lower interest rates. All you have to do is locate the credit union office nearest your area and inquire about their membership eligibility requirements.While a rare occurrence, some credit unions may not be able to extend credit to its members, especially those who are classified as not having a good standing.