Do you know the difference between a bank and a credit union?
Whether you are looking to save or borrow, there are numerous banks to choose from but credit unions are often overlooked even though they offer the same type of financial products and services.
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 can help you make the right decision for you and your money:
- Profit and Not-for-Profit
What makes banks and credit unions different is their profit status. Banks are either privately owned or publicly traded, while credit unions are non-profit member-owned financial cooperatives.
This divide is the reason for the difference between the products and services each type of institution offers.
- Membership and Customers
As community-focused savings and loans providers, credit union open membership to those who share a common bond, such as the industry they work in, or the community they live in.
At credit unions, each member is also an owner and has one vote in electing board members. Members can also run for election to the board.
Banks are owned and controlled by stockholders, whose number of votes depend upon the number of shares owned.
Customers don’t have ownership of voting rights, cannot be elected to the board, and have no say in how the bank is operated.
- Terms and conditions
It is the credit union’s mission to offer 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 dividends for their savings.
On the other hand banks are in business to make a profit rather than the needs of the account holders. This is one of the reasons why banks charge more fees, and at a higher rate, than credit unions do. Interest rates on lending also tend to be higher at banks.
Any profits that the credit union sees are distributed to its members in one of two ways – either by earning interest on their savings or by receiving a dividend once all overheads are paid.
In addition, the fact that credit unions are not-for-profit also means that they often have no lower deposit requirements to open accounts and don’t impose a minimum balance rule.
- Putting Members First
Credit unions are known for their excellent customer service.
When a member goes into a credit union branch, they can generally expect to get personal attention and a commitment to getting their needs met.
Credit unions also provide their members with necessary financial education as part of their services.
- Savings & Loans
Credit union savings accounts allow members to save small or large amounts whenever they can.
Their savings are also benefitting the wider community because they are being used to make loans available for other members.
When applying for a loan, members will find that credit unions do things differently too.
Staff are financially sympathetic and take the time to understand individual circumstances, not just look at the credit score. What’s more, the interest rate advertised, is the one received if the loan is approved – which is not always the case with banks.
Interest is charged on the reducing balance of the loan and can be paid back in different ways, including directly from the member’s salary if their employer is a payroll partner with a credit union.
Free life insurance is usually included at no extra cost and there are no hidden charges or penalties for repaying the loan early.
- Regulations & Protection
Credit unions and banks are regulated by the Financial Conduct Authority and the Prudential Regulation Authority which means that savings are protected up to £85,000.
Find out more about saving or borrowing from a credit union.