Pros and Cons of Credit Unions: Are They Better than Banks?

Posted in Banking • November 22, 2010

bank-or-credit-union

To the everyday person, the differences between national and even local banks and credit unions are subtle but important. The key difference, however, is that banks are for-profit and investor owned financial institutions, whereas credit unions are not-for-profit and member owned. As such, credit unions have different bottom-lines, loyalties and tax exemptions than banks. Here are some of the ways choosing a credit union could benefit you, as well as a few reasons why you might want to stick to banks:

Pro: Credit Unions Look After Their Members

When you open an account at a credit union, you become a part owner. In theory, this means that the credit union will be looking out for your best interests, instead of some Wall Street shareholder. Deceptive practices, hidden fees and other frustrating underhanded tactics typically levied upon consumers by for-profit banks should be rarer when you’re working with a credit union.

Pro: Credit Unions Are Not-For-Profit

The immediate benefit of not-for-profit status comes in the form of big tax breaks from the federal government. These savings are often passed on to you in the form of lower interest rates and less fees on auto loans, mortgages and business loans. Further, it removes the profit motive from their business model. The compulsion to rabidly chase down every dollar is often what leads commercial banks to enact unfriendly fee structures and pursue risky investments.

Pro: Credit Unions Are Insured

Credit unions are as firmly established and confidently backed by the federal government as commercial banks. In other words, you won’t be placing your money with some untested alternative savings or investment scheme. Just as banks insure your money through the Federal Deposit Insurance Corp., credit unions protect your deposits for at least $250,000 per account through the National Credit Union Administration. FDIC and NCUA insurance are equally safe, so your money is well-protected at a credit union.

That being said, credit unions aren’t a silver bullet for borrowing and savings woes. Here are some possible drawbacks:

Con: Credit Unions Offer Less Options

The fact that credit unions don’t get creative with finances is a plus for most member, but for those who want to try something riskier or unconventional, you probably won’t find it at a credit union. For instance, you won’t likely get a subprime car refinance from a credit union or a no doc mortgage loan–they tend to stick to the basics.

Con: Credit Unions Aren’t Impervious to Fees

While credit unions won’t be as strict about using ATMs from other financial institutions, they still have operating costs, overhead and payroll to cover. You may pay less in fees when compared to banks, but you won’t get a free ride.

Con: Membership Required

Credit union membership is usually limited to certain regions, professions or employers. While you can almost certainly find a credit union that will accept you, you won’t be able to join any credit union you’d like. For more information on finding a credit union, check out the Credit Union Locator from the Credit Union National Association.

Should You Choose A CU?

Whether you’re in the market for a home loan, auto loan or car refinance, it pays to do some comparison shopping. Include a credit union or two on your short list and see what a not-for-profit financial institution has to offer.

MoneyAisle is an online resource where consumers find great rates on auto loans and refinancing. They run live, reverse auctions (like a reverse eBay) for consumers shopping for financial products. Consumers get exclusive rates and instant one-stop shopping in a fun, dynamic auction format, and banks and Credit Unions get inexpensive access to new customers, accounts and loans.

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We would love to hear your comments and feedback

  • Duke

    The second “con” is silly – if the fees that Credit Unions charge are less than a normal bank, that would be a “pro” (why compare it to an institution that doesn’t charge any fee – that is, one that doesn’t exist?).

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