Whether you are looking for a loan or to open a checking account, you will likely come across many different banking options, including credit unions. Many people wonder what makes a credit union different from a bank, and which is the best option for them. This article is meant to help you sort out the pros and cons of both.
The Primary Differences Between a Bank and a Credit Union
The main difference between a bank and a credit union is a simple one: banks are for-profit businesses and credit unions are not-for-profits. This means that banks are either publicly traded or privately owned, and credit unions are owned by members. Banks make money from fees and what’s called the net interest margin: the difference between the interest rate they charge you for a loan and the interest rate your savings account earns. Credit unions make money from fees and interest margin as well, but they pass a lot of that profit along to their members in the form of lower interest rates. Many will charge a small one-time membership fee, which helps them bring in additional revenue. Since credit unions are not-for-profits, that means they are still concerned with bringing in revenue (the total income they bring in from their products), but do not operate with a profit target (the income that’s left after expenses and operating costs).
Credit unions and banks offer similar products: you should be able to get personal loans, mortgages, auto and home loans at both. Banks will often have more investment products and more options for commercial banking.
Why Go with a Credit Union?
If you’re looking for the best rate for your loan, chances are you’ll find it at a credit union. Since credit unions are not-for-profit, they return those profits to members in the form of lower interest rates and reduced fees. That savings can be significant. The Credit Union National Association reports the average rate for a 60-month auto loan was 1.38% lower at credit unions than banks in 2020. Besides a lower rate, here are some other benefits of banking with a credit union:
- More lenient requirements: Credit unions are more likely to be lenient when it comes to approving loans or having lower deposit requirements to open accounts. Banks, especially bigger banks, have standards they follow when deciding whether to approve loans.
- Your voice counts: Members have more of a say in a credit union’s operations. Members elect a volunteer board of directors to manage the credit union.
- More personalized service: Since a credit union’s customers are its members, you can expect customer service to be a main priority. Credit unions offer more than just loans and savings accounts; many offer financial education resources like seminars on planning for retirement or buying a home.
How to Become a Credit Union Member
You might think a credit union is not an option for you because you don’t belong to a particular group; there are backdoors to access them. That’s a common misconception. There are credit unions you can join in most communities. Organizations like the National Credit Union Administration have helpful tools to find credit unions near you. You might also be eligible to join a credit union through your employer, if they’ve established a relationship with a credit union. Or through a family member: even if that family member isn’t a credit union member, if they are eligible, you may be able to join. To become a member, you will need to make a small deposit (maybe as low as $5), which represents you buying a share of the credit union.
While banks are open to do business with anyone, credit unions only offer services to their members. A credit union’s members often come from a particular group, whether it’s a certain profession or geographical area. For example, the largest credit union in the United States, Navy Federal Credit Union, is open to members of the military and their immediate family members.
Why Go with a Bank?
While credit unions can offer benefits that might appeal to consumers, some people prefer to go with a traditional bank. Here are some of the benefits of going with banks:
- Greater availability: While there are credit unions in many communities, access could be restricted based on where you live. Banks are open to anyone, and often have more branches and ATMs you can easily get to, especially if you are traveling.
- Better digital access: Banks have placed a priority on mobile banking in recent years, expanding what you can do online. Credit unions don’t have the money to spend on online technology that banks do.
Helping You Decide
At the end of the day, who you decide to go with is based on what your priorities are. If you’re looking for the best rate and best customer service, a credit union might be better for you. But if you think more convenience and digital access are more important, a bank is better suited for your needs. We know that there are pros and cons to using both banks and credit unions. That’s why at Lend-Grow, we include both in our marketplace of lenders. Lend-Grow is inclusive, unbiased, and objective, and shows you the best deal for you, whether that is from a bank or a credit union. We don’t rank lenders based on fees like other marketplaces. Check your rate with Lend-Grow today and find the best fit for you.