2 Reasons Credit Unions Offer Better Rates Than Commercial Banks
If you are shopping for a loan for a significant purchase, getting the best interest rate can save you considerable money over the life of the loan. While numerous lending institutions exist, your search usually comes down to commercial banks or your local credit union. If you are already a credit union member or eligible to join one, you may be surprised to find your best interest rates there. Here are a few reasons credit union rates are lower than commercial banks.
1. Non-Profits Vs. For Profits
Most commercial banks are for-profit entities. A for-profit entity designs its business model to generate a profit for its investors. Interest income, or the income generated from the interest charged on loans, is revenue; this income, combined with fees for services, equals profits. This model means banks are vested in setting higher income rates to generate more profit. This profit is also subject to state and federal taxes. These costs must also be covered and accounted for by their investors.
Most credit unions are non-profit, tax-exempt entities. Due to their non-profit status, credit unions are not subject to state or federal taxation. This status means substantial monies credit unions do not have to pay to the state or federal government. The lack of tax allows credit unions to charge their members lower interest rates on their credit union loans.
2. Share-holders Vs. Members
Commercial banks answer to their shareholders who have invested in ownership of their business. Ownership is usually through their purchase of company stock that the investors expect to increase in value. Investors or stockholders may or may not be bank customers but simply hold a financial stake in the bank's stock prices rising. Banks raise interest rates and service fees to maximize this profit for the shareholders.
Members who own credit unions usually have something in common. Commonalities may include employers, neighborhoods, fraternities, or other civic or religious affiliations. A credit union's business model calls for the credit union to re-invest its profits into its services and programs dedicated to meeting the needs of its members. Because they do not have to maximize their profits for a return to their shareholders, they can charge lower interest rates.
If you think you may qualify, research to see if you can join your local credit union. You may discover that credit union rates will make taking out your loans and paying lower rates worthwhile.