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Bad Credit Are my chances of getting a loan better from a Credit Union?
To a regular guy, a credit union doesn't seem much different from traditional financial institutions. They both allow you to open savings accounts, make loans, write checks, and even use credit and debit cards. However, the similarities end there. A credit union sets itself apart from other financial institutions because of a few key features.
Let us first define what a credit union is, though.
Investopedia defines a credit union as:
"A member-owned financial co-operative. These institutions are created and operated by its members and profits are shared amongst the owners."
Investopedia goes on to explain further:
"As soon as you deposit funds into a credit union account, you become a partial owner and participate in the union's profitability. Credit unions are formed by large corporations and organizations for their employees and members."
On the other hand, a bank is defined as:
"A financial institution licensed as a receiver of deposits. There are two types of banks: commercial/retail banks and investment banks. In most countries, banks are regulated by the national government or central bank."
Debbie Dragon puts the differences between a bank and a credit union in this way:
Features of a bank: "Bank profits are returned as earnings to their stockholders. Stockholders receive their income through the bank customers. In order to serve the stockholders' interest, banks are incented to charge higher interest and fees in order to drive higher profits. The benefit of the bank’s for-profit nature is that it also incented to drive innovation in order to attract and better serve its customers. As such, banks often offer valuable features and services that credit unions are slower to adopt."
Features of a credit union: "Since the credit union isn't out to turn a profit, it can return its earnings to the members in the form of higher interest rates on savings products and lower interest rates on loans and credit cards. If a credit union should bring in more money than it requires to operate the organization, it will distribute the overage in the form of dividends to its members (everyone who has an account)."
Thus, if we simplify the definitions of Investopedia and Ms. Debbie Dragon, a bank is a commercial institution with being able to make a profit as its central drive. It serves its shareholders, and its account holders are its source of income and profits. On the other hand, a credit union is an institution whose account holders are also its shareholders. This is why their products are more friendly towards their account holders.
Another good feature of a credit union as opposed to for-profit financial institutions is that for those with bad credit looking for a loan the requirements may not be as strict. If you've been having trouble getting your loan approved with the standard financial institutions, then a credit union may be the answer to your problem. Because they are not-for-profit institutions, operate on a smaller scale and are more people-oriented, they may be more inclined to meet applicants with bad credit who need loans, assess them personally for creditworthiness, and possibly grant those loans despite bad credit.
Credit unions will, of course, assess their prospective borrowers closely. Yes, there is a higher likelihood of loans with bad credit getting approved, but the importance of good credit will never be neglected. The only reason why they will approve loans with bad credit is when the loan applicant is able to illustrate he is working on repaying his outstanding debt and is working on getting his bad credit back up to good standing.
There are other differences between a credit union and a regular financial institution (a.k.a. Bank):
Nature of the Institutions:
- A credit union is a non-profit entity.
- A bank is a for-profit/commercial entity.
- A credit union is insured by the National Credit Union Administration (NCUA), and the NCUA insures the member accounts of federal and state-chartered credit unions.
- A bank, on the other hand, is insured by the Federal Deposit Insurance Corporation (FDIC), and the FDIC insures the bank account holders for up to up to $250,000.
- A credit union will accept applicants based on certain membership factors like their residential location, where they go to work, which school they went to, the associations they belong to, and even where they worship. Credit unions will also qualify an individual based on if another family member is eligible for an account with that specific credit union.
- On the other hand, a bank can qualify anyone who can present the identity requirements.
- A credit union will have to accept applicants if they are eligible for the qualifying factors that they have stipulated. Say, if the credit union serves a certain company, then the prospective member is part of that certain company's workforce, he is already automatically eligible for the credit union membership.
- A bank has the right to refuse an applicant if he/she does not meet its standards.
These are the major differences between a credit union and other financial institutions. The bottom line though is that in spite of a credit union being more likely to approve members with bad credit for loans, higher approval rates of loan with bad credit do not indicate that they do not give emphasis to the importance of good credit. This factor is definitely universal between banks and credit unions, but the nature of how they serve their account holders, members and shareholders is the central differing factor with how these two institutions operate.