A credit union is a member-owned, non-profit financial institution. Credit unions offer members lower interest rates on loans, and better rates on savings.
- Credit unions are member-owned and non-profit, whereas traditional banks are for-profit.
- Members of a credit union create a communal pool of money which is used to fund loans for other members.
- Many credit unions have prerequisite requirements you have to meet in order to join.
What is a Credit Union?
A credit union is a member-owned, non-profit financial institution. Credit unions are created and operated by its members and as a result, profits are shared amongst the owners.
Considering this, credit unions often offer better rates for members on loans, savings, and fees. In the United States, there are approximately 5,757 credit unions with a combined 104 million members, whose assets equate together as $1.79 trillion. This makes up around 45.4% of the economically active US population.
How Does a Credit Union Work?
Members of a credit union create a communal pool of money. This money is then used to fund loans for other members. Any interest that is charged on a loan is used as a way of creating an income for the credit union. This money is then put back into the communal pool. On top of this, any savings that are not lent out from the pool to members can be used as another source of income for the credit union.
The credit union uses the communal pool of money that has been built up to pay for all operational expenses. It is also used to fund the dividend paid on members’ shares. Typically, credit unions adjust the services that they are able to offer their clients depending on the amount of money that they have.
How Can I Become Part of a Credit Union?
Most credit unions have a set of particular prerequisites that you must been in order to become a member. Usually, this is about sharing a common theme with the existing members of the union. This common theme could be: working for a certain employer, being part of a specific group (such as a labor union), have a family member who is an existing member, or living in a certain area.
However, in some cases you may be able to join a credit union even if you don’t meet the requirements. This would usually involve you paying a small, one-off and non-refundable fee to the credit union.
Is a Credit Union Different From a Bank?
To put it simply, yes. credit unions are different from banks and so are set up, and work differently to one another.
Credit unions are non-profit institutions, whereas banks are for-profit. This means that banks are either publicly traded, or privately owned. As such, when you open an account with a bank, you become a customer. When you open an account with a credit union, you become an owner as well as a customer.
The mission for a bank is to serve the shareholder rather than the customer. This is why banks usually offer lower interest rates on savings, and higher interest rates on loans. On the other hand, the main goal of a credit union is to serve the member, resulting in lower interest rates on loans, and better rates on savings.
Why Should I Join a Credit Union?
One of the major benefits of joining a credit union is the low fees. As there are no shareholders wanting to make a profit, transaction fees are not incurred to the same extent as with banks. Credit unions do still charge fees, but these are often less in number and cost than those with traditional banks.
Credit unions are known to offer higher interest rates than banks on both checking accounts and savings accounts. they also offer lower interest rates on a range of different loans, including personal loans, mortgages, and payday loans. The goal of the credit union is to ensure you are only paying for the loan, rather than also lining the shareholders’ pockets.
What Are The Disadvantages of Joining a Credit Union?
Probably the biggest disadvantage of a credit union is accessibility. If you want to take out a loan with a credit union or open an account, you must first become a member. The eligibility requirements can be quite specific to join a credit union, so if you cant meet these, you won’t be able to take out a loan.
Lots of credit unions can’t offer the level of services that banks can, due to their limited size. As well as this, credit unions are only found in specific areas – those that are being served by the credit union.