Is There a Difference Between Banks and Credit Unions?
Banks and credit unions offer similar services just on different scales. They are both are highly regulated organisations but banks for a long time have been more known due to their larger scale and reach. Credit unions, however, are on the rise as they are taking the necessary steps forward to advance into the technological age and reach out to the public. The fact that more and more organisations are operating in the digital world means that we have more of a choice on who we trust with our finances. We no longer have to just go with who our parents selected and instead can do our research and find out who is best for us. This is why we thought we would do some of the research for you and explain some of the differences that separate credit unions from banks.
Let’s first briefly explain both what a bank and what a credit union is…
A bank is a financial institution that provides products and services for its customers to care for their financial needs. Products and services such as savings accounts, home loans, overdrafts, credit cards, personal loans and term deposit are some, just to name a few. Banks offer a wide range of products due to the full range of customers they attract due to their international reach and large capital source. Whether it deposits from members, wholesale funds from the government or foreign investors, or just funds from the fees of their services, banks can obtain a significant amount of capital that allows them to operate with the extensive reach that they do. The sad thing, however, is that banks can generate this large amount of income from all their services, but it doesn’t necessarily translate into benefits for their customers. A bank’s sole purpose is to generate profits for its shareholders. This is one of the main differences that separate credit unions from banks.
A credit union, just like banks, offers financial products and services but they do so to a limited degree. You see a credit union operates as a co-operative to serve its members. It runs at a more national or local level and seeks to assist its members in their financial endeavours. Different from banks, credit unions capital comes solely from its members, but its profits also go back to their members in the form of better interest rates for savings and personal loans. A credit union operates as a not for profit organisation that is governed by a board of directors, which its members voted in. All decisions are made with the best interests of their members at heart. But due to their decreased reach and the lack of funding they receive when compared to other banks, doing so competitively can come at the cost of a reduced number of physical outlets and a smaller variety of financial products to offer. This is a downfall for credit unions when competing with a bank, but this lack of physical presence is made up elsewhere through their excellent personalised customer service.
Now the Comparison
Interest Rate Break Down:
Credit unions offer better rates to its members than what banks do to its customers. A credit union operates as a not for profit to better serve its members and assist them financially, whatever way they can. Banks need to run and produce a profit from their services, so their interest rates for loans are generally higher. A bank, however, can offer more of a variety of loans and products as they can afford to cater to the range of situations and needs that their customers might have. They do this as their broader customer base makes it difficult to offer personalised services for its customers. Credit unions, thanks to their smaller nature can provide more personalised services and often take each application on a case by case basis as they work with you to get the best outcome. A credit union can’t necessarily offer you the same variety of products (e.g. 24-month interest-free loans or 12-month interest-free credit cards), but they can provide loan rates and savings rates that are better across the board.
Banks are owned by their shareholders with the intention of generating a profit, credit unions are owned by their members. Banks serve to keep their shareholders happy as these investors want a good return on their money, so it’s their demands that have to be met before anything else. Credit unions are owned by its members. This is the case as upon joining; members must deposit $1 in an account to become an active member. The money deposited by it’s members is used to help fund other members, meaning the deposited amount makes the original member a shareholder. This ownership, therefore, allows its members to vote and elect a board of directors to best represent them and their wishes. It’s these elections that help give their members a choice of potential directors who will be tasked with the overall direction of the credit union.
So what one would be better for you, bank or credit union? Well, if you are searching for an establishment with a wide range of products and services and substantial international reach and accessibility, then a bank would be the choice for you. However, if you are after something a bit more personal, more affordable and is willing to listen, then a credit union is best for you. Both have their strengths and weaknesses with neither one being better overall for everyone. Some individuals prefer accessibility and variety, whereas some prefer personalisation and better options for their money. It’s best to do your research and make contact with your local banks and credit unions, find out which one will work for you and will be the best choice in helping you achieve your financial dreams.