After years of saving, you’re finally ready to find a mortgage lender. Or maybe you need to replace your vehicle with a newer SUV and are looking for an auto loan. Maybe your HVAC system needs repairs and you need cash quickly to cover the bill.
When you need to borrow money, big banks are often the first option people think of, but there may be a better alternative: credit unions.
Credit union loans tend to have lower fees and interest rates than bank loans, but there are other advantages that can also make them especially useful when you need to borrow money.
Banks are for-profit financial institutions. As a result, their goal is to make profits and satisfy shareholders. Credit unions work differently. Credit unions are member-owned nonprofit organizations that exist to serve their customers.
The difference in structure significantly affects your experience as a borrower. While a traditional bank maximizes its profits, a credit union returns its profits to its members in the form of lower fees and better rates. In short, borrowing money from a credit union may seem more like a partnership since it is a nonprofit institution.
The trick? To enjoy better loan rates and personalized service, you must be a member of a credit union. Credit union membership criteria may be limited to certain groups, such as residents of particular areas or specific employers.
Related: Credit Union or Bank: Which is Right for You?
Credit unions are often overlooked, but they typically offer a wide range of loan products. Whether you need a mortgage, car loan, or personal loan, a credit union can be a smart choice.
The annual percentage rate (APR) of a loan is the annual cost of borrowing money. The higher the rate, the more you will pay over the life of the loan. In general, credit unions tend to offer significantly lower interest rates than banks, so you could save hundreds or even thousands if you choose a credit union loan.
Below are the average loan rates offered by banks and credit unions for various loan products:
These rate differences can produce significant savings. For example, let’s say you bought a used car for $20,000. If you took out a loan through a bank and qualified for a 48-month loan with an APR of 7.73%, you would pay a total of $23,315 over the life of the loan.
But if you went to a credit union, you could qualify for a 48-month loan at 5.53%. At the end of your payment term, you would pay $22,339. Opting for a credit union with competitive rates would save you about $975.
Related: How to get the best personal loan rate
Credit union loans typically have lower fees than bank loans, so you’ll pay less money up front to borrow money. For example, some for-profit lenders charge upfront fees of up to 10% on personal loans. If you borrowed $10,000, that means you would pay $1,000 in origination fees to get the loan.
Credit unions rarely charge personal loan origination fees, saving you money.
Credit unions generally have less strict eligibility requirements than banks, so you’re more likely to qualify for a credit union loan if your credit isn’t perfect. For example, for-profit lenders typically require a minimum credit score of 650 or higher for a personal loan. But some credit unions require a minimum score of only 580.
A federal credit union must adhere to strict limits on interest rates. For most loans, the maximum rate a credit union can charge is 18.00%. Banks and for-profit lenders are not limited by this rate, so these lenders can charge 35.99% or more.
For borrowers with poor to fair credit, the top rate offered by credit unions may be lower than the best rate a for-profit lender can offer you, so you could save money by working with a credit union.
Read more: The best personal loans for bad credit
Payday loans are expensive, short-term debts. Taking loan fees into account, a personal loan can have the equivalent of an APR of 400%.
When you need cash quickly to survive until payday, a payday alternative loan (PAL) from a credit union can be a much better option. PALs are available through some federal credit unions and allow you to borrow between $200 and $1,000 and have up to six months to repay the loan. Federal credit union PALs have rate restrictions; The highest APR allowed is 28%.
Read more: 5 Ways to Pay Off or Refinance a Payday Loan
When you need money for an emergency, like a veterinary bill or a car repair, credit union emergency loans can be a helpful option. These loans can get you up to $5,000 quickly; In many cases, you can receive your loan funds as soon as the day you apply. And, if you’re already a credit union member, you may be eligible for a loan without a credit check.
If you have bad credit or have not yet built a solid credit history, a credit builder loan can be a convenient tool.
With a credit builder loan, you take out a relatively small amount (typically between $500 and $2,000) and repay it (with interest) within six months to two years. As you make payments, the lender reports your loan payments to the major credit bureaus, helping you build your credit. At the end of the loan term, the lender returns the principal to you.
It’s a sure-fire way to establish your credit and build a positive payment history, but credit-building loans from for-profit lenders can have high rates and fees. In contrast, credit unions that offer these loans tend to offer much lower rates and fees, so you can build your credit at a lower cost.
Credit unions reward their members with better interest rates, lower fees, and more flexible eligibility requirements for their financial products. Whether you plan to buy a car or consolidate high-interest credit card debt, a credit union loan will likely be more affordable than a bank loan, especially if your credit isn’t great.
If you are not already a member of a credit union, you can use the National Credit Union Administration’s locator tool to find a credit union in your area.