Should I Get an Auto Loan From a Credit Union?

When you’re in the market for a new or used car loan, the odds are good you’ll see credit unions advertising to get your business. Many people don’t even know what a credit union is, let alone that they can use one to get a car loan.

While credit union membership was once somewhat limited, today nearly every American qualifies to become a credit union member. Your town probably has at least one credit union, as do most colleges, large companies and military bases. There are credit unions for people who work at hospitals, credit unions for people who work in various government agencies and credit unions for teachers. Community credit unions serve everyone in their geographic areas.

There are more than 5,000 federally insured credit unions in the US looking to get your business.

Given that there’s a credit union for every Tom, Dick, Harry, and Harriet, you’re probably wondering if getting a credit union car loan makes sense. With the right credit union car loan, you could end up saving a significant amount of money on your auto financing, but you’ll want to make sure you get your car loan from the credit union that’s right for you.

At the most basic level, a credit union is a financial institution that offers banking services, like deposit accounts, loans and (in some cases) investment accounts. However, what makes credit unions different from traditional banks is that they are not-for-profit cooperatives. When you join a credit union, you become a part-owner of it. Credit unions don’t consider you a “customer,” they call you a “member.”

It’s that not-for-profit status that makes getting a car loan from a credit union an appealing proposition. Because credit unions don’t need to turn a profit, they don’t typically charge as high of interest rates as other lenders to pad their bottom lines. They are exempt from some of the taxes for-profit lenders have to pay, and that saves them money. They pass those savings on to their members in the form of lower loan rates and lower fees. The lower loan rates and fees save you money, and saving money is just one major reason to get a credit union car loan.

Another reason that some people are partial to credit unions is that they answer to members who elect their boards of directors, not investors.

Because members in a credit union share some characteristics, some credit unions may look at your auto loan application more holistically than a bank would. Think of the difference between the Bailey Building and Loan and Old Man Potter’s bank in “It’s a Wonderful Life.” The bank only looked at a few factors when deciding which vehicle loans to approve, but the Bailey Building and Loan considered other factors, like how hard of a worker the applicant was, when deciding. While today’s credit unions won’t be able to give you a loan because of your work ethic, they may be able to look beyond your credit score to assess your application.

Credit unions work by pooling members’ money. Many credit unions started on a small scale, with a few linked individuals putting their money together for investing and mutual aid. Rather than just opening an account at a credit union, you become a member. Any assets members deposit in the credit union can be used to make investments or loans, with the returns from those endeavors going back to members in the form of lower loan rates or savings dividends.

Credit union car loans take the money deposited by its members and lend it to other members who need an auto loan. They charge interest on the money, which is a percentage of the amount borrowed and serves as a kind of rental fee on the money (read more about how to finance a car and get a car loan). When borrowers repay the loan, they pay back the original loan amount, plus the interest. That revenue funds the credit union’s operations while allowing them to offer lower fees and higher savings dividends.

Individual car loan interest rates are going to vary based on your credit score, but a quick look at some of the annual percentage rates offered by the largest credit unions in the country shows that they do tend to be fairly low. The advertised rates shown here are current as of this writing, and your rate will vary based on your financial picture. To make it easy to compare, we looked for advertised new car loan rates for 60-month loans.

Though these car loan rates aren’t as good as the few zero-percent interest car deals offered by some new car manufacturers, they are better than the current average new car loan rate for someone with excellent credit, which is currently 7.88%.

To see how much a credit union car loan could save you, let’s do a comparison using our car loan payment calculator. We’ll assume a 60-month new car loan rate of 7.88% from a bank. If you borrow $25,000 for a new car, your total cost for the loan will be $30,329, meaning you’ll pay $5,329 in interest. If you take a credit union car loan for 60 months at a rate of 2.99% (the lowest rate at a major credit union we found this month), you’ll pay $26,946 overall, saving you almost $3,400 over the life of the loan – and that savings doesn’t take into account the reduced fees that some credit unions offer compared to other lenders.

Joining a credit union and getting a car loan isn’t tough. You simply need to find a credit union you’d like to work with and see if you qualify for membership. Individual credit union membership is usually open to people who share characteristics with the credit union’s members, like living in the same area, working at the same company, or having family members who are already members of the credit union. In most cases, you can apply for credit union membership online, and then apply for an auto loan right away.

When looking for a credit union to join, it’s a good idea to start with one that’s in your community. Local credit unions will have a finger on the financial pulse of your area, so they’ll have products and services that fit the region. You should also consider credit unions based on your job. For example, many school systems have credit unions for their employees that offer financial products uniquely tailored for educators. Most credit unions work directly with local car dealers, so you may get a slight discount or be able to apply for financing through the credit union at the dealership.

The main differences between credit unions and banks are ownership and profits. Banks are owned by their shareholders (people who buy stock in the bank). Credit unions are owned by their members (people who actually use the services the credit union offers). Banks are for-profit institutions, and those profits are given to shareholders. Credit unions are not-for-profit, so any money they make above their costs is returned to members in the form of higher savings rates (called dividends), lower loan rates and less expensive fees. Because they are not-for-profit entities, credit unions are taxed differently than banks, which allows them to save more money, and those savings get passed on to members as well.

Like banks, credit unions come in a variety of sizes, ranging from tiny single-branch credit unions with just a couple of employees to massive institutions that rival the size of some of America’s largest banks. The largest credit union based in the United States, ranked by asset size, is Navy Federal Credit Union. It has 11.5 million members and 350 branches spanning the globe to serve military members and their families.

When it comes to borrowing money to buy a car, the main difference between a credit union car loan and a bank auto loan is that credit union rates tend to be lower, and they usually have lower fees, too (note that individual car loan rates and fees will vary). Credit unions may also be able to take a larger view of your financial picture than a bank or other lender would, so you may have an easier time getting your car loan approved.

Most banks in the United States have their deposits insured by the Federal Deposit Insurance Corporation (FDIC). The credit union industry similarly insures its deposits through its regulator, the National Credit Union Administration (NCUA). The NCUA manages the National Credit Union Share Insurance Fund (NCUSIF) which provides $250,000 worth of insurance for a member’s savings accounts, plus additional coverage for joint and retirement accounts.

Banks and credit unions aren’t your only options when getting a car loan. You can also work with lenders that only offer loans, as opposed to banks and credit unions that offer other financial services. These firms are typically called finance companies. Some finance companies don’t have physical branches and take other steps to keep their costs low, so they may be able to offer you better terms than a bank or credit union.

Many automakers have financing arms that lend directly to car buyers. When you get a special financing deal from an automaker, you’re working with their “captive financing company.”

One type of bank, called a community bank, offers a blend of both bank and credit union features. While they are for-profit institutions, they have tighter links to local communities. A community bank may be able to offer more flexibility than large national banks with their unbending loan policies.