When you are looking for a new checking or savings account, a loan or a line of credit, you have more choices than just the myriad local and national banks that compete for your business. An often-overlooked option for these sorts of products is the credit union, which offers many of the same types of financial products and services that you can get at a bank.
But what exactly is a credit union, and how is it different from a traditional bank? Although both banks and credit unions have similar offerings, there are some important distinctions to make between these two types of institutions.
Understanding the difference between banks and credit unions can help you make the best decisions for you and your family. Here’s what you need to know about how banks compare to credit unions, so you can find the best home for your money.
For-Profit vs. Nonprofit
What makes banks and credit unions different from each other is their profit status. Banks are for-profit, meaning they are either privately owned or publicly traded, while credit unions are nonprofit institutions. This for-profit vs. not-for-profit divide is the reason for the difference between the products and services each type of institution offers.
A credit union is owned by its members, since the institution is actually set up as a cooperative. Credit unions typically open membership to individuals who share a common bond, such as the industry they are employed in, the community they live in, their faith or their membership in another organization. In addition, as a nonprofit, credit unions are also generally exempt from federal taxes, and some credit unions even receive subsidies from the organizations that they are affiliated with. This means credit unions do not have to worry about making profits for shareholders.
It is the credit union’s mission to provide its members with the best terms it can afford for their financial products. This means members generally get lower rates on loans, pay fewer (and lower) fees and earn higher APYs on savings products than bank customers do.
Banks, on the other hand, are in business to make a profit. This means banks are focused on making that profit, rather than specifically centering on the needs of the account holders. This is one of the reasons why you will often find that banks charge more fees, and at a higher rate, than credit unions do. Interest rates on lending also tend to be higher at banks, while their APYs on savings products tend to be lower.
Why Choose a Bank?
While the fact that credit unions are not-for-profit and member-focused may make them sound like the clear winner compared to banks, there are a number of reasons why consumers may choose banks.
To start, banks are open to any consumer interested in a product or account, provided the consumer doesn’t have a bad banking history. Credit unions are only…