When Are Credit Union Loans a Good Idea? Pros and Cons Explained

Written By
Julija A.
Updated
November 29,2022

Borrowing money from a credit union comes with certain benefits when compared to loans from other types of lenders. Credit unions typically offer the same products as banks but under more favorable terms. And unlike a bank, a profit-making organization, a credit union is a nonprofit run by a board elected by union members.

But depending on your situation, getting credit union loans may not be the best way to go (further) into debt. To make an informed decision, consider the pros and cons of credit union personal loans covered in this article.

Do Credit Unions Offer Loans Under Favorable Terms?

Because credit unions are not-for-profit organizations, they usually offer better terms to their members than banks do. This might include lower interest rates, reduced fees, and more flexible repayment terms. Also, the benefits of credit unions are not limited to loans: They also offer higher interest on savings, among other pros.

Moreover, credit unions may be willing to look past some factors that would keep a bank from extending a personal loan to a borrower.

How a Credit Union Personal Loan Works

Before applying for a personal loan, such as a debt consolidation loan, you need to become a credit union member, since credit unions serve members only. To become a member, you must pay a one-time membership fee and deposit up to a few dozen dollars.

Credit Score Requirements

Credit unions consider more than just your credit score when evaluating your loan application. Having a good score helps because it can get you a better interest rate. But just because you may be one of the 12% of Americans with a FICO score below 550 doesn’t automatically disqualify you from getting a loan from a credit union.

As a matter of fact, some credit unions are willing to approve loans to applicants with limited credit histories, though these are typically small loans. You’ll usually need a solid credit history if you need a home improvement loan or any other sizable loan.

Joint Personal Loans

If you don’t meet credit union personal loan requirements because your credit score is bad or your credit history is nonexistent, you can apply with a joint applicant. Having a co-signer can help you get more favorable conditions, such as a higher amount or a lower rate.

But remember that your co-signer will be held responsible for the loan if you default. Therefore, you should both be confident in your ability to repay before signing that loan agreement.

Alternative Personal Loans

Note that a federal credit union may offer a payday alternative loan to a member in need of quick cash. This kind of loan can help you pay for unexpected costs, like an urgent car repair or veterinary care for your pet, before your next paycheck comes in. 

The biggest benefit offered by these credit union personal loans is that the interest rates are much lower than those featured by payday loans disbursed by banks, never exceeding 28%. 

According to the National Credit Union Administration, there are two types of payday alternative loans:

Payday Alternative Loans I

Payday alternative loans I (PAL I) are credit union loans of between $200 and $1,000, with a maximum application fee of $20. The borrower must meet a one-month credit union membership requirement to be eligible for the loan. The repayment terms range from one to six months.

Payday Alternative Loans II

Payday alternative loans II (PAL II) comes with the following features:

  • Loan amounts of up to $2,000
  • Loan terms of up to 12 months
  • No membership requirement

Lower Annual Percentage Rate

Another reason you may want to apply for a loan from a credit union is a lower APR than those offered by banks and other physical or online lenders. Federal credit unions have an 18% APR ceiling for most loans and offer lower interest rates than banks on average.

The current APRs offered by federal credit unions are well below 18%. For example, a 36-month auto loan for a new vehicle comes with an annual percentage rate of 4.54% at Navy Federal Credit Union. On the other hand, a home equity line of credit from Alliant Credit Union could feature an APR as low as 7.25% APR and a maximum term of 360 months.

Loan Customization

You can apply for a secured or unsecured loan from a credit union. The monthly payment and loan term will depend on your debt-to-income ratio, credit score, and credit history. 

You need a good credit score to get an unsecured loan, which doesn’t require collateral such as your home or car. If you don’t have a good credit score, you can apply for a secured loan. For this type of loan, you will have to use one of your assets as collateral.

Online Loan Application

You may have the option of applying for a credit union loan online. But even then, you may need to visit the credit union branch in person to complete the paperwork.

The Key Benefits and Shortcomings of Credit Union Loans

A quick overview of the main advantages and downsides of loans offered by credit unions is in order to help you figure out whether applying for a personal loan would be a good idea.

Strengths

Some of the key benefits credit union personal loans provide are:

  • Loan repayment terms are more flexible compared to those offered by banks and other lenders. 
  • You may initiate the application process from your home before visiting a credit union branch to finalize the paperwork.
  • You have better chances of qualifying for a loan because credit unions consider various factors beyond your credit score.
  • The interest rate a credit union charges is usually much lower compared to those of banks. 

Weaknesses

The biggest cons of getting a loan from a credit union are:

  • These organizations may lack online and mobile banking technology.
  • You may need to meet a one-month membership requirement to become eligible to apply for payday alternative loans.
  • Unlike online lenders, credit unions may conduct hard credit pull to determine your creditworthiness, which may negatively affect your credit score.

Key Takeaways

In this guide, we explained how to get a loan from a credit union and discussed the main advantages and downsides of this type of lending. Credit unions usually have lower interest rates, lower fees, and more flexible payment terms than banks or other lenders. 

However, there are some downsides to borrowing from a credit union. For example, you may need to meet a minimum membership requirement or agree to a hard credit pull to obtain a loan from this type of organization, which is often not an option for borrowers with poor credit scores.

FAQ

What credit score do credit unions require for a loan?

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Some credit unions will approve loans even to borrowers with limited credit history (insufficient for a score). In general, credit unions look at more than just the credit score when deciding whether to approve a loan - for example, the applicant’s debt-to-income ratio. If you don’t have a good credit score, you can always apply for a secured loan and put up your home or car as collateral.

Is it hard to get a loan from a credit union?

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To become eligible for a loan, you must first become a credit union member. Getting credit union loans will sometimes also require a minimum membership track record.

Is it better to get a loan through a credit union?

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Yes, because loans from credit unions come with lower interest rates and more flexible payment schedules than bank loans.

About author

Albert Einstein is said to have identified compound interest as mankind’s greatest invention. That story’s probably apocryphal, but it conveys a deep truth about the power of fiscal policy to change the world along with our daily lives. Civilization became possible only when Sumerians of the Bronze Age invented money. Today, economic issues influence every aspect of daily life. My job at Fortunly is an opportunity to analyze government policies and banking practices, sharing the results of my research in articles that can help you make better, smarter decisions for yourself and your family.

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