Banks vs Credit Unions
Banks and Credit Unions offer the same products and services, for the most part. However, there are differences that will affect which type of financial institution would be best for you.
- For profit
- Usually large, public companies
- Paid Board members
- Ultimate owners are shareholders
- Not for profit
- Typically small and local
- Run by “member-owners” on a one member-one vote system
- Board members are unpaid volunteers
- Members earn interest and sometimes dividend checks
Fees, Incentives & Rates
Banks: In general, banks charge more expensive fees than credit unions. They pay lower interest on deposit accounts and charge higher interest rates on loans. However, they usually offer the best rewards on credit cards.
Credit Unions: Fees tend to be lower than bank fees, membership requires a very small deposit and don’t require a minimum daily balance. Furthermore, they typically offer higher rates of return on savings accounts, especially high-yield products such as money market accounts and CDs.
Product & Service Variety
Banks: Offer many financial products and services beyond consumer banking, such as a wider range of consumer products and services.
Credit Unions: More narrowly focused on financial services for consumers. Financial products are narrower; however, they make up for it by offering better insurance rates, lower fees, and personal service.
Which is better?
While Credit Unions have many positive attributes, a number of financial benefits, and ideally offer better deals because they don’t have outside investors trying to maximize and increase profits at the expense of the customers, there are exceptions to the rule.
Community banks have priorities that are comparable to credit unions, including serving local populations and giving back to the community. Additionally, Credit Unions aren’t always more affordable than banks.
Some credit unions act like big banks and charge the same high fees as their competitors. As not-for-profit organizations, those credit unions enjoy tax benefits that do not come back to the members as intended.
Nonetheless, the biggest weakness we see with Credit Unions is a term called cross-collateralization. Cross-collateralization refers to when a loan is used as collateral for another loan. Cross-collateralization can get confusing, as there are multiple moving parts and it can be hard to keep track of what loan is collateral for the other.
Beware of Cross-Collateralization
Cross-collateralization is a term used when the collateral for one loan is also used as collateral for another loan.
For instance, if a person has borrowed from the same credit union, like a car loan secured by the car, a home loan secured by the home, the car and all the loans can be used as cross-collateral for other loans.
If the person pays off the car loan and wants to sell the car, the bank may veto the deal because the car is still used to secure the home loan and other loans that may be overdue.
In addition, if an individual becomes past due on a loan, the financial institution may take money out of the customer’s bank checking/savings account or freeze the account until the loan becomes current.
Because cross-collateralization reduces the lender’s risk, credit unions often offer cross-collateralized loans to help give borrowers the lower interest rates and higher CD rates they offer.
In summary, Credit Unions have many advantages and are recommended by the iInvest®Team for various consumer needs. However, one should think carefully before having all your eggs-in-one-basket.
Having a car loan, boat loan, house loan, a Visa/Mastercard, checking/savings all at one institution, especially if cross-collateralization exists, is not recommended. This is because no matter how financially secure a person thinks they are, nobody can predict the future.
It falls along the same line of thinking regarding our recommendation of a Nest Egg (6+ months income saved) always.
If you have any questions about Credit Unions, how they are different from traditional banks, or cross-collateralization, we urge you to contact our team or registered investment advisors and financial planning specialists today! We would love to help you navigate your unique financial situation.
Written by Craig Dillon
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