Credit unions are a type of financial institution that operates similarly to banks. However, while banks are privately-owned, credit unions are owned by its members, which is known as a cooperative. Because cooperatives operate for the benefit of its members, credit unions typically have much lower interest rates than banks. In addition, credit unions also offer similar financial products as banks, including checking accounts, saving accounts, and loan options.
What Are Credit Unions?
Credit unions are local, community-based cooperations owned and operated by its members. They can vary between having hundreds or even thousands of members, all of whom must share some bond, such as residing in the same neighborhood, having the same employer, working in the same career, attending the same church, or joining the same trade union.
Interestingly, credit unions are also non-profit organizations. Since its members, rather than shareholders, own these institutions, the credit union returns its profits to its members or uses them to develop their services.
Like banks, credit unions are regulated by an external federal body called the National Credit Union Administration (NCUA). The NCUA levies many consumer regulations that banks are subject to.
Why Become A Credit Union Member Instead Of A Bank Customer?
Credit unions offer a variety of benefits that banks do not. All credit unions run with three goals in mind:
- Offering low-interest loans
- Motivate members to save their money
- Support members who need financial aid or professional advice
Credit unions are invested in their members’ interests because they want to make sure members don’t receive loans they can’t repay. They can determine the likelihood by reviewing a member’s income and, sometimes, their savings.
Additionally, the Federal Credit Union Act limits how much interest credit unions can charge to 15%. But, this regulation also gives the NCUA the authority to increase this cap for 18-month terms if current interest rates jeopardize the institution’s ability to operate.
What To Expect When You Borrow Through A Credit Union
Credit unions lend money to other members by using funds pulled from their members’ savings and checking accounts.
In order to apply for a loan from a credit union, you must be a member. Additionally, some branches may require that you build a savings account before you borrow. Interest rates vary based on the type of loan and the credit union, but the average is between 1.5% and 11.5%.
One of the most significant advantages of borrowing from a credit union is that they do not subject borrowers to hidden fees or penalty rates if you repay your loan before the end of the term limit. Aside from that, credit union loans are similar to those from banks.
Another perk of banking at a credit union is free life insurance. This policy ensures that if you pass away before the loan is paid in full, the credit union will cover the remainder of the loan.
Many credit unions offer unsecured loans with term limits up to five years. For secured loans, where you offer an asset as collateral, you can expect a term limit of up to ten years, though some may offer as many as 25 years for these types of loans.
If you are interested in borrowing from a credit union or becoming a member, contact your area credit union or visit them online for more information.
How To Borrow From A Credit Union
Since you must be a member in order to borrow money from a credit union, the first step is joining one. Like banks, you will need to bring a form of ID such as a government-issued ID and Social Security number.
Ways To Repay Your Loan
Credit unions offer a variety of ways to repay your loan, though some may not permit all of them. These methods include:
- Visiting a branch and making a payment in-person
- Connecting your bank account to make automatic payments
- Through your employer: If you are a member of a credit union for a specific trade or employer, you can request your employer to withhold payments directly from your wages
- Through your benefits: Like the previous option, you may have the choice to repay your loan through your benefit payments
- “Borrowing from a Credit Union.” Money Advice Service, www.moneyadviceservice.org.uk/en/articles/credit-unions.