Credit unions are an option most people lean towards as an alternative to the traditional banking system. In this article, we will look at how credit unions differ from banks, and why they might be a better choice for your situation.
There are a few key differences between credit unions and banks. Let’s discuss them as it will help you get a better understanding of credit unions in general.
- Credit unions are classified as nonprofit organizations, while banks are not
- They offer more flexible borrowing terms than banks, typically giving loans at lower interest rates and fewer restrictions on how the money can be used.
- More comprehensive banking products and services than banks usually offer, such as checking and savings accounts, insurance, and mortgage products.
The main goal of credit unions is to promote financial empowerment for their members, which often includes giving access to low-cost loans and other financial services.
What Exactly Is a Credit Union?
A credit union is a type of organization whose members are generally individuals, rather than businesses. Besides loans and other financial services, credit unions offer savings accounts to their members. These accounts can be used for everyday expenses like groceries, bills, rent, or car repairs. Credit unions are regulated by the federal government, and people sometimes choose them over banks because they offer lower interest rates on loans and savings accounts.
These federal credit unions are unique in that they are not-for-profit organizations. What this means is that they are not driven by profit but exist to help their members accomplish their financial goals. The main advantage of this type of business is that is centered on a customer. This means they are better prepared to provide services like emergency cash assistance and affordable loans to people who need them the most.
If you’re interested and wondering how to join a credit union, be sure to do research on available options in your community. You can even find information about local credit unions online.
How Does a Credit Union Work?
By now you know what is a credit union but let’s tackle some other questions you probably have. Who owns a credit union? This financial institution is typically owned by its members. These members share profits and losses of the credit union and have no individual rights to withdraw funds. Now let’s answer what they offer and how does a credit union work. Members create a communal pool of money available for giving loans to other members. Interest charged on these loans generates an income for the credit union. They are offering a variety of services such as loans, savings, and credit counseling.
Credit unions were first founded in the early 1900s as small businesses began to move away from traditional banking institutions. In today’s world, there are more than 2,000 credit unions across the United States.
Credit Union vs. Bank: What’s the Difference?
Some of the main differences include lower interest rates and more flexible lending policies credit unions offer as opposed to a bank. This often makes them a more attractive alternative for consumers but there are other differences as well.
Here are some important differences between banks and credit unions:
- Banks will offer fewer loan options than credit unions.
- Banks usually have higher minimum deposit requirements in order to open an account. Minimum requirements to put down as a deposit for a credit union can be as little as $5 while most banks ask for at least $100.
- Bank accounts can be easily closed or transferred to another bank. When it comes to a credit union account, this whole process typically requires a lot more time and effort.
Credit Union Advantages and Disadvantages
A credit union is an institution generally smaller and more specialized than a bank. As for their members, they are more of employees of the credit union, rather than customers of a traditional bank. In continuation we will lay out some pros and cons that come with choosing a credit union over a bank, so be sure to take it into consideration before you choose your lender.
One of the main benefits of a credit union compared to a bank is having more options when it comes to savings and loans. They usually have lower overhead costs, so they offer lower interest rates to their members. Additionally, they have more flexible terms which is a big plus if you want to borrow money for unusual or short-term purposes. Because you are rather a member than a customer, they often have more generous membership policies and support. By choosing a credit union over the bank, you will surely get a more personal service and attention because they are smaller.
Credit unions also don’t really have aggressive marketing and advertising, which leads to higher interest rates and hidden fees of banks who use these tactics.
Now that we covered some advantages, let’s take a look at credit union disadvantages.
Credit unions are not as well-known as banks, so it can be harder to find one that suits you the best. They are also not as widely available, so they may not be an option for everyone.
Credit unions are not subject to FDIC insurance, meaning that depositors funds are at risk if the credit union fails. This may not apply to all the unions out there so you should do research on a specific one you want to join.
Before you decide to become a member, you should take into consideration that members must pay a fee and they can require you to have some balance on your account in order to keep your membership.
When it comes to answering a question what is better a bank or credit union? The choice will depend on your personal preferences, needs, and goals. We recommend you weigh out these pros and cons just to be sure you are making the right decision.
How to Become a Member of a Credit Union?
If all said above made you want to become a member here are some things to think over first. Credit unions are fairly different from a bank in many ways, so you’ll need to get familiar with them before you join. First of all, there are many credit unions out there and for some of them, you may not be eligible to join. Once you find a union you would like to be a part of, visit their website or schedule a meeting in their office to get more information.
If you met all the requirements and are able to join, you’ll typically be asked to pay a small fee the members pay. After becoming a member, you can choose what type of account you want or if you want multiple of them. Don’t get discouraged because there are many people willing to help and guide you through the whole process.
There are many differences we discussed between banks and credit unions. While we cannot tell you which one to choose, we provided you with a guide to help you in making a decision. We hope we gave you an answer to why use a credit union, but don’t forget that both banks and them have plenty of advantages and disadvantages.
Think about it before making a decision on where to open your accounts and take out a loan. If you ever feel confused by all the information available keep in mind you can always reach out to a financial advisor to get professional help in choosing the best option.