What are credit union loans and how do I get one?
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If you’re looking for a personal loan, you might consider a credit union, a member-owned, not-for-profit financial institution.
Credit unions offer an alternative to banks, which are for-profit institutions. Unlike banks, you must be a member of a credit union to use their services, but loans from credit unions 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?
Loans from credit unions work the same way as bank loans: 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 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 are turned down by a bank.
Credit unions offer many of the same services as banks, but they have a mutual aid philosophy. Their non-profit status means that all profits generated are returned to members in the form of lower interest rates, lower fees and higher savings rates.
Alternative payday loans
When you need cash quickly to cover unexpected expenses, you might consider a payday loan. But these small, short-term loans are a very expensive way to borrow money. They usually come with fees equivalent to three-digit annual percentage rates, or APRs, and can trap borrowers in a cycle of debt. For this reason, payday loans should only be considered as a last resort.
An alternative payday loan, or PAL, is a less expensive option. You can find PALs through some federal credit unions. The fees associated with a PAL are generally much lower than those of payday loans, but they have the same objective: to provide you with fast cash when you need it. With a PAL, you might be able to borrow more money, have more time to pay it back, and pay a lower interest rate than you would likely pay with a payday loan.
You must be a member of a credit union that offers PALs and generally have been in good standing for at least one month before you can apply for a PAL, but sometimes you can apply immediately.
Each credit union can set its own standards regarding the PAL approval process. For this reason, a PAL may be more difficult to obtain than a payday loan, but a PAL is a better product. In fact, due to their predatory nature, payday loans are banned in some states. It’s worth shopping around with various credit unions for a PAL rather than getting a payday loan.
How do credit union loans work?
You can apply for secured and unsecured loans from a credit union. Secured loans use your property as collateral, and if you don’t repay the loan, the lender can seize your collateral.
Loans from credit unions can really benefit you if your credit score is fair or poor. If you have excellent credit, you’ll likely 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 other than credit score, such as your credit union membership status. If your score is low, it may be worth opening a savings account with the credit union.
You can find credit unions at the federal and state level. Federal credit unions cannot charge an APR of more than 18% for a loan, and many charge less than that. Also, many credit unions allow co-signers on personal loans. A co-signer promises to repay the loan if you don’t. If you don’t qualify for a personal loan on your own, you may still be able to get a loan with a co-signer.
Loans from credit unions versus 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.
Requirements vary to join a credit union. The best way to join 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 membership requirements. Some only require that you live in the area served by the credit union. Others are sponsored by employees or intended for the military. If one family member qualifies, the whole family can usually join. It usually costs around $25 to join a credit union, although membership fees vary.
Once you join a credit union, follow these steps to get a credit union loan:
- Determine the maximum loan amount you need. The amount your credit union lets you borrow depends on your financial situation, such as your credit history, employment status, and debt-to-equity ratio.
- Check your credit. Although credit unions can be more flexible with lending standards, they still have standards in place to protect their members. 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 major credit bureaus at AnnualCreditReport.com.
- Apply for the loan. You will need to provide personal information, such as proof of address, phone number, date of birth, and social security number. Payslips, tax returns and bank statements may also be required.