A cheaper way to borrow – Forbes Advisor

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You can take out a personal loan from a wide range of institutions, including a traditional bank, online lender, or credit union. While traditional banks may have branches across the country, credit unions are often local to their community. This means that you must meet the eligibility criteria to join a credit union and take out a personal loan.

You can have access to favorable interest rates and lower fees if you choose to obtain a personal loan through a credit union. However, they generally don’t offer a pre-approval process like most big banks. Find out how personal loans from credit unions compare to those from other lenders and how to determine if this is the best decision for you.

How a credit union personal loan works

Credit unions can be local to a community and controlled by members who elect volunteer board members to oversee the institution. If you meet the eligibility criteria, such as if you live, work, or worship in a particular area, you will usually be required to pay a one-time fee and a cash deposit. You must become a member before applying for a personal loan from a credit union, which is just one type of personal loan.

You can usually apply for a secured or unsecured loan. Whichever loan you choose, it will carry a fixed interest rate, which is determined by evaluating your credit score and history, income and debts. Generally, the higher your credit score, the better the terms of your loan.

Although credit unions consider your credit score as an important factor in determining your creditworthiness, a low score will not prevent you from getting a loan. Fortunately, credit unions look at your entire financial situation when reviewing your application. Not all credit unions are alike, which means the application process, qualification requirements, and pricing will be different depending on your local institution.

Credit Union Personal Loan Rates

Personal loans from credit unions generally have lower maximum interest rates than most traditional banks and online lenders. For example, federal credit unions cap annual percentage rates (APR) at 18%, which means that even if you don’t have stellar credit, you won’t pay more than 18% interest. This is great considering some online lenders have interest rates of up to 36% for borrowers with low credit scores. Keep in mind that not all credit unions are federal credit unions, so you might find one that has interest rates above 18%.

However, while federal credit unions generally have lower maximum interest rates than online lenders, the minimum interest rate available may be higher than what you’ll find with an online lender. In December 2020, for example, personal loans at Navy Federal Credit Union start at 7.49% while personal loans at LightStream are as low as 2.49% for borrowers with the best credit enrolled in autopay.

Credit union vs bank personal loans

Although banks and credit unions offer personal loans, you will have different experiences depending on where you borrow. Here are some notable differences you can expect between credit unions and bank personal loans:

  • Banks favor excellent credit: If you have a great credit score and already belong to a traditional bank, you’ll probably have a hard time qualifying for a personal loan. But if you don’t have a good credit score, your bank might be less willing to work with you, even if you already have an account there. Credit unions tend to offer a bit more leniency, usually on a case-by-case basis.
  • Credit unions are primarily community-based: Although there are some credit unions that allow anyone in the country to join, most only serve community members. They are run by members, not a select few. To become a member, you must meet certain requirements, such as living, working, or worshiping in the community.
  • Customer service and user experience varies: Banks usually have the capital to create a better online user experience through their website and mobile app. They may also have more features that improve your experience, like Zelle, which lets you seamlessly send money to friends and family. Credit unions may lack user experience, but they tend to offer better customer service options than banks.

Credit union vs online personal loan

With the rise of technology, online lenders are becoming more common in the lending space.
Here’s how credit unions compare to online lenders when it comes to personal loans:

  • Online lenders offer faster approvals: Many online lenders offer pre-qualification just to see if you are eligible to apply. Once you are pre-qualified, you can apply and get funds in your account within a day of completing your application. Many credit unions require membership for a fixed term, such as a few weeks or a month, before you can qualify for a personal loan. Also, most do not offer a pre-qualification process.
  • Credit unions have lower maximum interest rates: Some online lenders target low credit score borrowers. If you don’t have good credit, you could see interest rates of up to 36%. This does not include set-up fees and any late payment, prepayment or insufficient funds fees. Although credit unions charge fees and interest, their maximum interest rates tend to be lower than most online lenders.

3 things to know about personal loans from credit unions

If you’re considering getting a personal loan from a credit union, make sure you understand how it differs from other types of lenders. Here are three things you need to know before applying for a personal loan:

  1. Memberships are required: Credit unions are member-based and not-for-profit. This means that you will need to register before you can take advantage of the offers. If you need to borrow money quickly, you won’t find too much urgency with a credit union and you may need to look elsewhere for a personal loan.
  2. Your creditworthiness is not limited to your credit score: Although credit scores are an important factor in determining your eligibility, credit unions also look at your ability to repay the loan and how you will use the funds. If you don’t have good credit, credit unions are much more willing to work with you than banks and online lenders.
  3. You may not know if you are eligible to borrow: Some online lenders offer pre-qualification to let you know if you qualify for a loan before you complete an application. Most credit unions don’t offer this, which means if you want to see if you qualify, you’ll need to submit an application. If you are denied, your credit score may temporarily drop and you will still need to apply to other lenders for your loan.

About Judith J. George

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