Credit union loans: Potentially lower rates and benefits for members

Couple applying for a credit union loan at their local credit unionImage: Couple applying for a credit union loan at their local credit union

In a Nutshell

A credit union loan is a good option to consider if you’re looking for an alternative to a personal loan from a bank. Credit unions are not-for-profit financial institutions that aim to help members save money with lower-interest-rate loans. Plus, you may have a better chance of getting approved for a personal loan from a credit union.
Editorial Note: Credit Karma receives compensation from third-party advertisers, but that doesn’t affect our editors’ opinions. Our third-party advertisers don’t review, approve or endorse our editorial content. It’s accurate to the best of our knowledge when posted.
Advertiser Disclosure

We think it's important for you to understand how we make money. It's pretty simple, actually. The offers for financial products you see on our platform come from companies who pay us. The money we make helps us give you access to free credit scores and reports and helps us create our other great tools and educational materials.

Compensation may factor into how and where products appear on our platform (and in what order). But since we generally make money when you find an offer you like and get, we try to show you offers we think are a good match for you. That's why we provide features like your Approval Odds and savings estimates.

Of course, the offers on our platform don't represent all financial products out there, but our goal is to show you as many great options as we can.

Getting a credit union loan is a good option when you need to borrow money — whether it’s to pay for an emergency expense, consolidate debt or fund a big purchase.

A personal loan from a credit union can have several benefits over personal loans from other types of lenders. Generally, credit union loans can offer lower interest rates and fees. And a credit union may be more open to lending to borrowers with less-than-perfect credit.

Here’s what you need to know about credit unions and credit union loans.

Credit union basics

Credit unions offer similar financial products and services to banks. With both credit unions and banks, you can access services like direct deposit, mobile banking, ATM access and overdraft protection. Financial products available through both credit unions and banks include credit cards, secured and unsecured personal loans, mortgages, auto loans and home equity lines of credit.

But banks are for-profit institutions in the business of using money to make money — and credit unions are nonprofit organizations. Credit unions are member-owned, cooperative institutions. If you qualify to join and are approved for a loan at a credit union, your loan can be funded by other members’ savings.

Credit unions can use their nonprofit status to pass savings along to their members, giving them higher interest on savings accounts and charging lower interest rates and fees on loans. And even if your credit’s not so great, you may still be able to get a personal loan from a credit union.

What you need to know about credit union loans

1. You’ll need to be a member

Each credit union has criteria for who can join. Membership eligibility is usually based on a common bond among members, like location, relationship to an existing member, or membership in a church, school, labor union or homeowners association.

You can find credit unions in your area via the National Credit Union Locator. Once you find a credit union you want to join, review the membership requirements. If you’re eligible, you can contact the credit union directly to join.

2. You may get a lower interest rate and fewer fees

The goal of a credit union is to promote financial well-being for its members — not to turn a profit. As a credit union member, you may be able to get more favorable loan terms — like a lower interest rate and fewer fees — than you might get from a bank or other type of lender.

Federal credit unions can’t charge you an annual percentage rate, or APR, higher than 18% for most types of loans they offer. But the average APR for an unsecured three-year loan from a credit union is much lower: 9.22%, according to data collected by the National Credit Union Administration.

Compare credit union rates to those offered by online lenders, some of which may charge APRs of up to 36%.

With a lower APR, you’ll save money overall — and you may also have a lower monthly payment.

“The potential for lower interest rates alone is a reason to consider a credit union over a traditional lender,” says Chad Rixse, CEO and Wealth Advisor at Far North Capital.

Not only are the interest rates typically lower, but the associated fees may also be lower. By charging lower fees, credit unions can “continue to help members with smaller loans, making them a cost-effective option for personal loans,” says Ron Smith, senior vice president of Texas Trust Credit Union.

3. You might have better odds of approval

If you have strong credit, you might have access to favorable loan terms like low APR. But credit unions may be willing to work with you even if you’ve struggled with credit in the past.

Some credit unions provide loans to borrowers that have rough credit or no credit history at all. If you’re already a member of a federal credit union and you need fast cash, a payday alternative loan can help you make ends meet until your next paycheck.

While you likely won’t find interest rates as low as you would for other unsecured personal loans, federal credit unions cap APRs at 28% for payday alternative loans. The equivalent APR for traditional payday loans can be as high as 400%.

If you want to build your credit, another type of credit union loan to consider is a credit-builder loan. Improving your credit can help your chances of getting favorable loan rates and terms in the future.

Just remember that a credit union may not be willing to give you a loan — even if you’re a member — if they don’t consider you a member in good standing.

4. You might have limited access and a low-tech experience

Credit unions typically serve a smaller customer base than traditional banks. You might find that your credit union has a limited number of physical branches. And some credit unions may not be using the latest personal banking technology, which may also be inconvenient for you.

Bottom line

Credit unions are similar to banks in many ways, including the products and services they offer. Still, there’s one area where credit unions generally get much higher marks than banks — customer satisfaction.

Never be afraid to reach out and ask about membership and interest rates. It’s always important to shop around and look at multiple offers from a variety of lenders before deciding which personal loan is best for your situation.

If you qualify for membership at a credit union, you may be able to get a lower interest rate on a personal loan. But be sure you understand all of the terms of the loan you’re offered before you sign.

About the author: Sarah Sharkey is a personal finance writer who enjoys helping people make better financial decisions. She especially loves to help young people learn how to set up their finances for a better future through her blog, … Read more.