If you’re in the market for a personal loan, you might consider a credit union, a not-for-profit financial institution owned by its members.
Credit unions offer an alternative to banks, which are for-profit institutions. Unlike banks, you need to be a member of a credit union to use its services — but credit union loans can come with lower interest rates and flexible terms. Keep reading to learn how credit union loans work and how to get one.
- What are credit union loans?
- How do credit union loans work?
- How do you join a credit union?
- How to get a credit union loan
Credit union loans work the same way bank loans do: You borrow money from a financial institution that you must repay, with interest, according to the terms of the loan. You’ll need to join a credit union in order to qualify for a credit union loan, which may come with a lower rate and lower (or no) fees. It may be possible to qualify for a credit union loan even if you get turned down at a bank.
Credit unions offer many of the same services banks do, only they have a people-helping-people philosophy. Their not-for-profit status means that any profits generated are returned to members in the form of lower interest rates, lower fees and higher savings rates.
Payday alternative loans
When you need quick cash to cover unexpected expenses, you might be considering a payday loan. But these small, short-term loans are a very expensive way to borrow money. They typically come with fees that equate to annual percentage rates, or APRs, in the triple digits and can trap borrowers in a cycle of debt. For this reason, payday loans should only be considered as a last resort.
A payday alternative loan, or PAL, is a less costly option. You can find PALs through some federal credit unions. The fees associated with a PAL are generally much less than payday loans, but they serve the same purpose — getting you fast cash when you need it. With a PAL, you might be able to borrow more money, have longer to pay it back and pay a lower interest rate than you’d likely pay with a payday loan.
You need to be a member of a credit union that offers PALs and generally be in good standing for at least a month before you can apply for a PAL, but you can sometimes apply for one right away.
Each credit union can set its own standards regarding the approval process for a PAL. For that reason, a PAL might be more difficult to get than a payday loan, but a PAL is a better product. In fact, because of their predatory nature, payday loans are banned in some states. It’s worth it to shop around with various credit unions to get a PAL versus getting a payday loan.
You can apply for both secured and unsecured loans at a credit union. Secured loans use your property as collateral, and if you don’t repay the loan, the lender can seize your collateral.
Unsecured loans aren’t backed by collateral. Because of that, lenders tend to charge a higher interest rate for unsecured loans than they might charge for secured loans.
Credit union loans can really benefit you if your credit score is fair or poor. If you have an excellent credit score, you’re likely to get a good loan rate no matter where you apply. But because credit unions serve their members and are often small, local financial institutions, they often consider factors besides just credit score, such as your standing as a credit union member. If your score is low, it may help to have a savings account set up with the credit union.
You can find credit unions at both the federal and state level. Federal credit unions can’t charge an APR of more than 18% for a loan, and many charge less than that. Also, many credit unions allow cosigners on personal loans. A cosigner promises to pay back the loan if you don’t. If you don’t qualify for a personal loan on your own, you might still be able to get a loan with a cosigner.
Credit union loans vs. online lenders
Another alternative when shopping for personal loan rates is to use an online lender. Digital banking is convenient, but it’s a good idea to compare interest rates. Credit unions tend to offer better rates to their members with poor credit scores than an online lender would.
Requirements vary for joining a credit union. The best way to join one is to find a credit union near you. You can use this tool from the National Credit Union Administration (NCUA) to find one.
Next, visit the credit union's website to determine the membership requirements. Some require only that you live in the area the credit union serves. Others are employee-sponsored or for military members. If one family member qualifies, the whole family can usually join. It typically costs around $25 to join a credit union, though membership fees vary.
Once you’ve joined a credit union, follow these steps to get a credit union loan:
- Determine the maximum loan amount you need. How much your credit union allows you to borrow depends on your financial picture, such as your credit history, employment status and debt-to-income ratio.
- Check your credit. Although credit unions can be more flexible with lending standards, they still have standards in place to protect their membership. When applying for any type of loan, the higher your credit score, the better. You can request free copies of your credit report from the three main credit bureaus on AnnualCreditReport.com.
- Apply for the loan. You’ll need to provide personal information, such as proof of address, your phone number, date of birth and Social Security number. You might also be asked for pay stubs, tax returns and bank statements.