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By Jamie Smith
Whether you're considering purchasing a new or used car, you're also likely to be thinking about how to finance it. If you're looking for auto financing with low rates and customer-focused services, you should consider the option of borrowing from a credit union.
Thousands of consumers across the country choose credit unions over banks when they're looking for auto financing. One reason for this is that credit unions operate as not-for-profit organizations focused on providing the best services at fair prices to their members. If credit unions make money from their services, they use these financial resources to pass on savings to members.
Banks, on the other hand, operate to turn a profit. They are answerable to their shareholders, who want the bank to generate bigger profits so that they receive higher returns on their investments. This shareholder pressure can lead to banks offering services aimed at generating profits rather than meeting customers' needs and expectations.
Another benefit for customers who choose an auto loan from a credit union is becoming a member of the credit union. Membership allows each customer to be a partial owner of the credit union, giving them the chance to influence its decisions. By contrast, people receiving an auto loan from a bank don't become members. They don't have the same level of control over how the bank operates.
Due to these different structures, there are different requirements for obtaining an auto loan from a bank or credit union. A loan from a credit union is only available to members. The membership fee to join a credit union is usually very low and is a one-time payment.
Bank loans are open to everyone, as long as the customer can meet the bank's lending requirements. However, the related fees and charges collected by banks can prove more costly.
An auto loan from a credit union works in much the same way as a car loan from other financial institutions. Once your application is approved, you make regular payments over a set period of time until the total amount, plus interest, is repaid.
One difference is that the funds for the loan come from the money deposited by the credit union’s members. Since credit unions aren't dependent on investors for their financial resources like banks are, they can be more flexible in determining loan terms.
One of the main benefits of taking out an auto loan with a credit union is that you'll likely obtain a lower interest rate than you would from a bank. In September 2020, for example, the average interest rate on a five-year loan for a new car was 4.96% APR from a bank. The average interest rate for a similar loan from a credit union was just 3.18% APR, according to the National Credit Union Administration.
Car loans typically last several years. As a result, even a small difference in your interest rate can result in significant savings. For instance, if you took out a $25,000 loan, you'd pay $720 less in interest if it had a rate of 3.18% APR than you would if the interest rate was 4.96% APR.
A further benefit of borrowing from credit unions is that they usually offer you lower lending limits. You may find this helpful if you're planning to buy a used vehicle, or if you've saved up a large down payment and only need to borrow a modest amount of money. Banks are less open to lending smaller amounts because there's not as much money to be made out of these loans. Many banks prefer you to take out larger loans over a longer period of time, which can result in paying more interest.
Another advantage credit unions offer is lower fees and charges. Banks may charge loan application fees, and often have charges for checking accounts and credit cards. By contrast, credit unions keep fees to a minimum. Any fees that are in place, such as for late payments, are generally lower than comparable fees charged by banks. The more supportive approach credit unions have toward members is possible because credit unions exist to serve members' interests, not to generate profits.
Finally, credit unions have built their reputation on getting to know the personal needs of their members. They’re also based in the community, which allows them to respond more directly and in a friendlier way to member needs. This helps credit unions make the process of accessing auto loans and other financial services more straightforward and much less intimidating.
Depending on your financial circumstances, you may find that securing an auto loan from a credit union is easier than getting financing from a bank. One reason for this is that credit unions can look beyond a member's credit score and take other factors into account when reaching a decision on a loan application. For instance, a credit union may place greater emphasis on someone's current employment status or other factors.
If your credit score is excellent, you may find that it's just as easy to secure a bank loan as it is to get financing from a credit union. People with the highest credit scores often receive the lowest interest rates and other favorable terms from banks.
If you're thinking about becoming a credit union member to secure an auto loan, your membership could bring you a number of additional benefits. Credit unions offer a wide range of financial services, including checking and savings accounts, credit cards, and investment options. As a member of a credit union, you can take advantage of more favorable terms on these services than you'd get from a bank or other financial institution.
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