Credit unions have become more competitive with the nation's banks. They can open accounts for almost anyone, even businesses, write mortgage loans, and generally provide any basic banking service that for-profit banks can.
And over time, credit unions have become fiercely competitive. Their not-for-profit status allows them to operate without a goal of profitability. Their tax-free status means they don't have a huge expense that taxed, for-profit banks have to pass on to their customers. Without the need to generate a profit, or pay taxes, credit unions have a massive advantage on the banks -- an advantage that can benefit the customer.
Borrowers win at credit unions
Data compiled by SNL Financial and the National Credit Union Administration suggest that credit unions offer lending rates that are on par or better than the nation's banks. The average credit union prices its credit cards, car loans, and mortgages at rates lower than the average for-profit banking institution, in part due to the efficiency of a not-for-profit business model.
You'll notice car buyers are perhaps the biggest winner at credit unions, which price car loans at nearly half the rate of for-profit banks. This is nothing new. Going back several years in the data, I found credit unions have historically priced their car loans at a 1.5%-2% discount to loans from the average banking institution.
The difference is so substantial that individuals with an auto loan at a for-profit bank might want to consider refinancing their loan at a credit union. The savings can add up to thousands of dollars over the life of the loan.
Credit unions are more conservative in how they manage their assets and liabilities, and thus prefer the short amortization period of car loans. Whereas a 30-year mortgage carries the risk of rising interest rates over the life of the loan, a car loan can be easily matched with certificates of deposits, for instance. Credit unions will compete aggressively for car loans, but largely match the banks' rates on mortgages, which are longer-term loans by their nature, and less preferable to credit unions because of their longer duration.
How credit unions stack up for savers
Savers fare better at credit unions across the board. The average credit union offers CD, money market, and savings rates well above the national average for banking rates. The disparity is most dramatic for longer-term savings vehicles such as certificates of deposit, where credit unions pay nearly 50% more on five-year CDs than banks.
This is, again, partly due to conservatism in how credit unions structure their assets and liabilities. Credit unions want longer-term deposits to reduce their interest rate risk. Banks have more fee revenue than credit unions, which acts as a form of insulation from the swings in interest rates.
Speaking of fees, the chart above doesn't reflect the common bank service charges that you won't find at a credit union. Following a reduction in fees banks earn on debit cards, banks created account maintenance fees to offset their lucrative debit card revenue.The result is a monthly charge for accounts that do not maintain a minimum balance.
Credit unions, formed for the purpose of helping low- and middle-income Americans create savings, have largely avoided monthly account fees for their customers.
If, like many people, you made a financial New Year's resolution, you might just want to start by picking a new place to store your savings and borrow your money. The average credit union has a huge advantage on your average bank. This year is the perfect year to make the switch.
