If you’re shopping around for a checking account, savings, mortgage, or credit card, it can be hard to tell the difference between credit union and bank.
Banks and credit unions may offer similar products, but they are two differently run models. Each has its pros and cons, and depending on your needs and goals, either might be a good fit.
Take a look at this guide to determine which is best for you in the credit union vs. bank competition.
What is a bank?
Before deciding between bank vs. credit union, it is important to understand how each one works. To start: the biggest difference between credit union and bank is their business models. A bank is a for-profit business. When you go to a bank, you are working with a company whose primary goal is making money.
In order make a profit, banks borrow money from people like you and me, businesses, and from other banks at a low interest rate. Banks then loan out that money at a higher interest rate. If you have a savings account at a typical bank, you will have an interest rate around 0.01%. But if you get a mortgage loan from the same bank, odds are your interest rate will be around 4.65%.
Say someone gets a mortgage loan for $400,000 at 4.65%. At 4.65%, a bank earns almost $19,000 in interest. But to borrow the $400,000 from the savers, it only has to pay $4,000 in interest. The $15,000 spread is profit on the loan, which the bank uses to pay for operations, pay shareholder dividends, and invest in growing the company.
Banks work hard to bring in lots of customers and fund as many loans as possible. The more customers with checking and savings accounts, the more money they have to lend. And the more money to lend, the bigger the profit.
What is a credit union?
A credit union offers the same products as a bank and brings in revenue the same way, but credit unions are not-for-profit companies. Rather than bring in as much profit as possible to benefit shareholders, a credit union only needs enough revenue to cover operating costs.
Where individuals and investors own banks, members own credit unions – and each credit union customer is also a member. Members must be eligible to join based on the credit union’s criteria. Some credit unions are only for people who live in the area. Some are for people who work for particular companies. Others are for workers in specific industries or for individuals who support a certain cause.
I used to have an account at a credit union in Colorado just for people who worked for state or local government or lived in the area. In Portland, I belonged to a credit union for people in the Portland area. My last mortgage was for a house in Portland but from a credit union in Washington, D.C. To join, I had to make a $10 donation to a charity that supports military veterans.
But each time, I knew that my needs came before profits and was able to get better customer service and save money.
Which is safer?
To some, banks may feel safer because they are larger than credit unions, but that’s not the case. The United States government backs the checking, savings, and certificate of deposit accounts of banks and credit unions.
The Federal Deposit Insurance Corporation, or FDIC, backs bank accounts. The National Credit Union Administration, or NCUA, backs credit unions. Both offer very similar protections for your deposits, and both are regulated to help protect your money. In the event a FDIC member bank or NCUA member credit union fails and goes out of business, the government will reimburse you for your account value with interest.
Which offers the best interest rates?
Credit unions typically offer better interest rates for consumer accounts. Credit union checking and savings accounts often pay more interest and, loans usually charge less.
However, this is not always the case. Online-only banks regularly offer better interest rates on checking and savings than credit unions. And sometimes banks offer lower rates on loans when trying to draw in new customers.
Which offers the best products?
Because of their need to grow and profit, banks are more innovative and offer a wider range of services than credit unions. Again, this is not always the case but more of a general guideline.
Some large banks – including Chase, Citi, Bank of America, U.S. Bank, and Wells Fargo – offer an array of banking, borrowing, investing, and other services. Credit unions are often more focused on a few core checking, savings, CD, mortgage, and auto loan products. Some credit unions are more likely to offer personal loans than banks, but otherwise, banks tend to offer more diverse products.
Because of their larger resources, banks also tend to have better digital offerings, such as online and mobile banking. Credit unions are a little slower to adopt new banking technologies.
Which is right for you?
If you prefer to work with a smaller organization that is more likely to give you personal customer service, a credit union is the best choice. Being homegrown, locally managed, and operating as a non-profit is enough reason for many people to be loyal credit union customers for life.
If you prefer cutting-edge technology, self-service, frequently updated online banking and mobile apps, and the flexibility to have virtually every need met under one roof, banks are the right choice.
Personally, I prefer to have a checking and savings account at an online bank and an account at a local credit union for cash deposits. I’ll shop around each time I need a new loan.
There is no perfect answer for the credit unions vs. banks debate. The answer depends on your specific needs. The next time you need a new account and are deciding credit union vs. bank, shop around. Compare the rates, products, and available technology. If you do, you will find the right fit for you.
Interested in a personal loan?Here are the top personal loan lenders of 2018!
|Lender||APR Range||Loan Amount|
|1 Includes AutoPay discount. Important Disclosures for SoFi.
2 Includes AutoPay discount. Important Disclosures for Payoff.
3 Important Disclosures for FreedomPlus.
4 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
5 Important Disclosures for LendingPoint.
6 Important Disclosures for LendingClub.
All loans made by WebBank, Member FDIC. Your actual rate depends upon credit score, loan amount, loan term, and credit usage & history. The APR ranges from 6.16% to 35.89%. For example, you could receive a loan of $6,000 with an interest rate of 7.99% and a 5.00% origination fee of $300 for an APR of 11.51%. In this example, you will receive $5,700 and will make 36 monthly payments of $187.99. The total amount repayable will be $6,767.64. Your APR will be determined based on your credit at time of application. The origination fee ranges from 1% to 6% and the average origination fee is 5.49% as of Q1 2017. There is no down payment and there is never a prepayment penalty. Closing of your loan is contingent upon your agreement of all the required agreements and disclosures on the www.lendingclub.com website. All loans via LendingClub have a minimum repayment term of 36 months or longer.
7 Important Disclosures for Earnest.
8 Important Disclosures for Avant.
* The actual rate and loan amount that a customer qualifies for may vary based on credit determination and other factors. Funds are generally deposited via ACH for delivery next business day if approved by 4:30pm CT Monday-Friday. Avant branded credit products are issued by WebBank, member FDIC.
** Example: A $5,700 loan with an administration fee of 4.75% and an amount financed of $5,429.25, repayable in 36 monthly installments, would have an APR of 29.95% and monthly payments of $230.33
* Important Disclosures for Upgrade Bank.
Upgrade Bank Disclosures
** Accept your loan offer and your funds will be sent to your bank via ACH within one (1) business day of clearing necessary verifications. Availability of the funds is dependent on how quickly your bank processes this transaction. From the time of approval, funds should be available within four (4) business days.
|7.73% – 29.99%||$1,000 - $50,000||Visit Upstart|
|5.81% – 15.37%1||$5,000 - $100,000||Visit SoFi|
|6.87% – 35.97%*||$1,000 - $50,000||Visit Upgrade|
|8.00% – 25.00%2||$5,000 - $35,000||Visit Payoff|
|4.99% – 29.99%3||$10,000 - $35,000||Visit FreedomPlus|
|5.99% – 18.99%4||$5,000 - $50,000||Visit Citizens|
|15.49% – 34.49%5||$2,000 - $25,000||Visit LendingPoint|
|6.16% – 35.89%6||$1,000 - $40,000||Visit LendingClub|
|5.49% – 18.24%7||$5,000 - $75,000||Visit Earnest|
|9.95% – 35.99%8||$2,000 - $35,000||Visit Avant|