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Debt Management

Credit union loans: What they are and how they work

Credit union loans are a viable option for many financial circumstances

Summary

From covering a short-term emergency to funding a business, credit union loans are versatile and come with many benefits. Here’s everything you need to know about them and if one is right for you.

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If you’re searching for a loan of any kind, be sure to add a credit union to your list of prospective lenders.

Finding one shouldn’t be hard – there are over 5,335 federally insured credit unions in the U.S., compared to 4,708 federally insured commercial banks.

While many financial institutions will let you borrow a lump sum of money that you can use for various reasons, credit unions tend to offer the most competitive rates and attractive terms, plus an array of other compelling benefits.

See related: Guide to minority-owned credit unions

What is a credit union loan and how does it work?

Although credit unions provide virtually all of the same services and products as banks, these not-for-profit financial cooperatives are owned and controlled by their members. The goal is to enable members to borrow at the lowest possible cost.

As with all loans, you borrow a fixed amount of money and then delete it according to a specific time frame, such as 12 months, five years or longer. It may be secured by property (such as a car or home) or unsecured.

In either case, the payment will remain consistent until the obligation is fully repaid. An interest rate is attached to the loan and finance fees are embedded in the payments.

Credit unions furnish loan activity to the major credit reporting bureaus, so the loan you get will appear on your files. If you manage the loan responsibly by making on-time payments, it will improve your credit rating.

Steps to getting a credit union loan

While credit union loans are only available to members, joining is easy, says Mary Svoboda, interim president and CEO of Jax Federal Credit Union.

  • Search for a credit union you can join. Visit the National Credit Union Administration’s website and use the Credit Union Locator. Some are for people in certain fields – such as teaching and law enforcement – while others are for residents of certain cities or communities. There is no limit to the number of credit unions you can join, but the idea is to be a fully engaged member – a place to do most or all of your financial business.
  • Make sure the credit union offers the loan you want. “Once you know the three or four credit unions that you can join, call each and ask about their loans,” says Svoboda. “It should be the size and type you want.” For example, if you’re hoping for a $50,000 loan to jump-start your small business, ask if they offer loans of that size, along with requirements and terms.
  • Become a member. Joining the credit union is as simple as scraping together a few bucks and opening a share deposit account – a savings and/or a checking account. “The deposit amounts are really low,” says Svoboda. “Ours is just $5! That makes you a member and then you can apply for the loan.”
  • Complete your loan application. You can apply for the loan in person, over the phone or online.

Requirements for a credit union loan

Adam Marlowe, principal market development officer for Georgia’s Own Credit Union, says the main – and most compelling – difference in credit union loans versus those granted by other lenders is the individualized approach to qualification. An applicant’s credit scores and debt-to-income ratio are assessed, but that’s just a start.

“Every situation is different,” says Marlowe. “There is no one-size-fits-all approach at a credit union. That’s what makes credit union loans unique. It’s OK if you have less than stellar credit. We want you to come in and sit with a specialist.  Explain your dream, tell us what the loan is for and we will work with you.”

Pros and cons of credit union loans

Aside from more forgiving qualification requirements, there are other benefits to turning to a credit union for a loan. The pros include:

  • Capped interest rates. As per NCUA rules, federal credit unions can’t charge APRs higher than 18% for most loans. That’s a stark difference from loans from other lenders, which can be 30% or more.
  • Lower average APRs. According to the NCUA, in December 2019, the average APR for a 36-month unsecured fixed rate loan was 9.36%, as opposed to a bank’s 10.18%. The APR for a 60-month new car loan was 3.53% and a bank’s was 5.16%.
  • Few fees and no prepayment penalties. Another advantage, says Svoboda, is that credit unions don’t charge prepayment fees. Therefore, if you want to pay the loan off early, you won’t be penalized.

However, a couple of cons include:

  • Less sophisticated technology. Some regional credit unions are tiny and don’t have the resources to put into technology. It can take longer for a loan to be approved than a large bank, and the credit union may not offer the top-notch mobile platforms that almost all banks offer.
  • May not find the right credit union. You may have trouble finding a credit union to join because of your profession or location. So, while the rates and services tend to be great, you may not be able to take advantage of them.

Credit union loan vs. payday loan

If you need a few hundred dollars to make ends meet, you may consider pursuing a payday loan. With it you would borrow from your future paycheck and pay it back in two weeks. The cost, however, can be extreme.

The Consumer Financial Protection Bureau found that payday lenders with a brick-and-mortar presence typically charge $15 for every $100 you take out, which puts the interest rate for the typical two-week loan at 391% APR. The fees – and therefore the APR – for online payday lenders can go even higher.

For this reason, Marlowe advises against borrowing from your paycheck. This may be the perfect opportunity for a credit union to assist.

“Credit unions are willing to loan money to members when, where and how they need it,” says Marlowe. “That includes being in a tight situation where you just need a little to get by. Maybe your car needs repairs and you’re short $400. They’ll issue loans in those increments. It’s not lucrative for the credit union to make loans of such small amounts, but that’s not what the credit union is about.”

A credit union loan will always be better than a payday lender. The APR for loans between $200 and $1,000 at a credit union is capped at 28%, and there is no origination fee.

So, the payback amount for a credit union loan of $400, if repaid over four months at the highest APR of 28%, would be $423.60. Your monthly payments would be $105.90, totaling an extra $23.60 in interest. That’s a substantial savings compared to the payday loan that also demands a near-immediate repayment term.

Loan alternatives

Sometimes a loan isn’t what you need, though, even when a credit union’s interest rates are low. Two alternatives include:

Balance transfer credit cards

Credit unions offer debt consolidation loans, but you may qualify for a credit card with 0% APR for 15 months or longer. All it would cost you is the origination fee of about 2%.

Imagine your debt totals $4,000:

  • Transfer it to a credit card offering 0% APR for 15 months. With a 2% fee, the debt is $4,080. Send equal payments of $272 and you’ll be debt-free without a penny paid in interest.
  • A credit union loan with an 11% APR, paid off in 15 months, would cost $300 in interest, with payments of $287.

The downside to the balance transfer credit card option is that you have to qualify for the account. Most require credit scores of 670 to 850.

See related: Best balance transfer credit cards

Promotional rate credit cards

Another option is a credit card offering a 0% APR on purchases for a certain number of months. With it, you can charge what you want during that time period and no interest will be added to the debt. Delete the balance by the end of the promotional period and you’ll walk away with a free loan.

However, as with the balance transfer card, you’ll need high scores to get a great deal.

See related: What is an intro APR and how does it work?

Which option is best?

When borrowing money, the appropriate choice depends on your financial circumstances as well as what you’re looking for:

  • Paying for things you can afford. Consider a credit card. You can borrow up to the limit then pay the bill within 30 days with no interest added. If you get a rewards card, you’ll even earn as you charge.
  • Financing an expensive purchase. If you can qualify for a 0% APR card and pay the balance off within the interest-free time frame, this makes sense. If you don’t have good credit, a credit union loan would be better.
  • Deleting high-interest debt. A 0% APR balance transfer credit card is best if you will repay the bulk of the balance before the real (higher) interest rate begins. If you can’t, a credit union loan with a steady, low rate is preferable.
  • Covering a short-term emergency. A credit union loan is the best option for the lowest cost.
  • Purchasing a car or home. Check out a variety of loans across the financial institution landscape. Credit unions are excellent options, but that doesn’t mean a bank shouldn’t be part of the equation. Compare rates before applying for one.
  • Starting a business. Credit unions are an excellent place to begin your financing search. You may also be eligible for a crowdfunding loan though a platform like Kiva, which offers loans of up to $10,000 with no interest added.
  • Building or repairing credit. Most credit unions offer credit-builder loans. With one, you deposit money into an account and obtain a loan of the same amount. You repay in installments and the credit union notifies the credit reporting bureaus of your timely payments – thus helping you achieve good credit.

See related: Credit union cards: Weighing the pros and cons

What type of consumer do credit union loans help the most?

There is no one specific credit union member, says Jon Skelly, vice president of marketing for True Sky Credit Union. However, when it comes to obtaining a loan at the lowest rates, a consumer who had a hard time qualifying in the past will especially benefit.

“Loans from credit unions were specifically created to help people in the first place,” says Skelly. “Because of our not-for-profit model, we can loan money at the lowest rates. That includes to people who have had trouble in the past. We think of members as people we can serve and try to take a comprehensive look at them and their finances. We look at your work history and life circumstances.”

Marlowe agrees. A person in a difficult financial position is their ideal member. “We live for this,” says Marlowe. “To help people understand how to get ahead, improve their finances? That’s what we want. Come in, give us your scenario and we’ll talk you through your options. If you want a loan, we find ways to help you get the most affordable one.”

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The editorial content on this page is based solely on the objective assessment of our writers and is not driven by advertising dollars. It has not been provided or commissioned by the credit card issuers. However, we may receive compensation when you click on links to products from our partners.

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