When people think about financial institutions for depositing savings or taking out a loan, banks are what generally come to mind. With thousands of banks across the country, consumers have almost limitless choices for finding the highest rates on a certificate of deposit or the lowest rates on a mortgage or car loan. Recent statistics from the Federal Deposit Insurance Company show that there are nearly 7,500 commercial banks, employing nearly two million people and holding assets of nearly $10 trillion. Clearly, bank customers are in good company.

However, one alternative to traditional commercial banks sometimes provides better benefits to customers. Credit unions, which invite certain groups of customers to unite to form and govern financial cooperatives, exist throughout the country, with more than 8,500 credit unions in business as of September 2006. If you want to consider all of your financial options with regard to saving or borrowing money, checking out credit unions should be on your list.

Not exclusive clubs
Many credit unions have a reputation for being somewhat akin to exclusive social clubs. The laws that govern credit unions require them to limit the group of people that can form their membership base. Credit unions often have names that refer to specific occupations or geographical areas, leading many to believe that they wouldn't be eligible to join. For instance, a credit union might have the word "Teachers" in its name, even though its eligibility for membership extends to students, administrative staff, and family members.

However, larger credit unions are seeking to expand their membership bases in order to foster growth. For example, Pentagon Federal Credit Union, which has its headquarters in northern Virginia, primarily serves members of the armed forces, government workers within defense-related government agencies, and employees of certain private companies in the defense industry, such as General Dynamics (NYSE:GD). Relatives of eligible members are also invited to join. Moreover, even if a prospective customer has no ties to the armed forces or defense industry, the customer can become eligible simply by joining an organization that supports military families across the country. Pentagon Federal boasts 700,000 members.

Cooperative advantages
Because of their particular structure, credit unions have certain inherent competitive advantages over banks. Most notably, credit unions enjoy tax-exempt status because of their nonprofit, membership-driven philosophy. This has been a thorn in the side of commercial banks for a long time, since they have to pay taxes on their profits. Banks point to growth in the asset base of credit unions, as well as the types of services they offer, as evidence that these tax breaks give credit unions an unfair advantage.

On the other hand, credit union representatives point out that while assets held by credit unions have been growing at a steady pace, they still amount to only about $700 billion, less than one-tenth the assets held by banks. Some individual banks, including Citigroup (NYSE:C) and Deutsche Bank (NYSE:DB), have total assets that exceed those of the entire credit union industry. Furthermore, supporters point to some of the challenges that credit unions face, including more strict regulation, limits to their customer bases, lower capital requirements, and access to financing through public and private capital markets. These challenges, they argue, offset any advantages obtained from tax-exempt status.

Better rates
Whatever the reason, you can often find better deals both on loans and on savings vehicles at credit unions. According to research done by the rate tracking company Bankrate (NASDAQ:RATE), the average credit union offers more than 1.5 percentage points more in interest on one-year CDs than the average bank, while charging 1.25 percentage points less on a typical home equity line of credit. As an example, Pentagon Federal is currently offering 6.25% on CDs with maturities between three and seven years, which is nearly a full percentage point higher than the best bank CD rates listed on Bankrate.

Some credit unions are seeking to expand their scope into other types of financial services. Just as banks have started offering in-house sales of mutual funds, brokerage accounts, and insurance products like annuities and universal life insurance policies, credit unions are also beginning to examine whether their cooperative focus can help them offer a wider range of financial products in a more customer-friendly manner. Although credit unions face the same regulatory challenges as banks to make it absolutely clear to their customers that these new product offerings are not insured against loss in value, it seems only natural that they will jump at the chance to meet all of their customers' financial needs from a single location.

Looking beyond the teller line
Another advantage of credit unions is the ability for members to participate in the governance of their credit union. Unlike commercial banks, where control is vested in shareholders holding a majority of the voting stock of the company, credit unions give each of their members a single vote, regardless of the amount of money they have on deposit or the size of their loans. If they wish, members often have the opportunity to take a more active role in learning about credit union policy and can even run for election onto the credit union's board of directors.

Some of the terminology that credit unions use may be unfamiliar to those who've worked solely with banks in the past. Because having an account is what gives credit union members their membership rights, many credit unions refer to checking and savings accounts by different names, such as draft accounts and share accounts. Although the names for accounts may be slightly different, the better rates often make up for the extra effort to learn a new vocabulary.

Credit unions represent a small segment of the assets held by financial institutions, but they offer an alternative for those looking for more favorable rates on loans and savings. Whatever your particular financial needs, it may be worth your time to see whether a credit union can give you the best way to meet your goals.

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Fool contributor Dan Caplinger is strongly considering joining the ranks of Pentagon Federal members. He doesn't own shares of the companies mentioned in this article. Bankrate is a Rule Breakers pick. The Fool's disclosure policy always gives you its best.