Consumer Blog

If you’ve recently been shopping for a car loan or mortgage, chances are good that you’ve been comparing interest rates and investigating what’s available at banks, credit unions, and online institutions. If so, you’ve probably noticed better rates from your local credit union.

That’s not a fluke. According to the National Credit Union Administration (NCUA), the national average rate for a 36-month used car loan at a credit union was 6.33% in the fourth quarter of 2023, while the average rate for banks was 7.17%. The same is true when it comes to interest rates on savings — the average return on a 5-year CD at a credit union is 2.93%, compared to a 2.02% return at banks.

But why, exactly, do credit unions have better rates? We asked the experts, and are unpacking the answers.

1. Credit unions are not-for-profit organizations

The biggest and most important difference between credit unions and banks is the profit structure. Banks are generally for-profit, and credit unions are not-for-profit. Because credit unions don’t have shareholders to answer to, they can funnel any excess revenue back to their members in the form of better rates.

“Unlike banks, which aim to maximize profits for their shareholders, credit unions return any surplus income to their members,” Michael Murdoch, Director of brand and marketing at CU Collaborate, explains. “That comes in the form of lower interest rates on loans, higher interest rates on deposits, lower fees, etc.”

Another benefit of credit unions’ not-for-profit status? They get some major tax breaks that can help them operate more efficiently. Credit unions don’t pay corporate income taxes, or most other federal taxes, thanks to the National Credit Union Administration exemption granted by the IRS. That said, they do still owe some money to Uncle Sam, like payroll taxes and local property taxes. “Congress granted credit unions a tax exemption from most taxes, but not all taxes,” says Carrie Hunt, America’s Credit Unions Chief Advocacy Officer. “The goal behind that was to allow credit unions to take that tax revenue and pass it along directly to consumers.”

2. Credit unions are community-oriented

Credit unions often get a bad rap for being small, but that’s a big part of why they can offer better rates to their members. Rather than trying to maximize profits, credit unions care about helping the community — so they’ll often offer more perks to keep their members coming back. “Credit unions typically will serve members who live, work, worship, go to school or are relatives of existing members in a particular community,” Murdoch elaborates. “That community-oriented focus leads to a more personalized service and a commitment to supporting the financial health of that membership base.”

In fact, because of the hyperlocal business model that many credit unions operate under, they may know much more about borrowers than other lenders might. This specialization lets them offer terms that rarely exist at big banks. “Many credit unions do signature loans,” Hunt explains. “So without any collateral, they will loan money to a member who needs it, based on just the promise to repay.”

That may sound like a risky endeavor. But Hunt emphasizes that because CUs get to know their members over a long period, they know the ins and outs of their financial situations. Rather than just going off of a single application, they know the person’s entire banking history — and can recommend the best path forward for them.

3. Credit unions are member-owned

Another reason why credit unions often have better rates than banks is that they operate like cooperatives. All the capital that flows in and out of a credit union technically belongs to its members, which Hunt says “creates an inherent structural benefit” for members. So, rather than funneling extra money to shareholders, credit unions give any surplus back to their members in the form of higher interest rates on their savings.

Plus, credit unions are run by volunteer boards composed of their own members, so even if you’re not a high roller at your local CU, you still get a vote for who serves on its board of directors. “This democratic approach ensures that the credit unions’ operations are aligned with the members’ best interests,” Murdoch explains.

4. Credit unions are regulated differently than banks are

Financial services are heavily regulated in the U.S., but some of the rules for credit unions are different from those for banks. For example, although some regulations are designed to mirror one another, like FDIC insurance at banks and NCUSIF insurance at credit unions, there are a few places where the rules diverge quite a bit — and lending is a big one.

Credit unions are prohibited from charging excessively high interest rates on loans, and as public interest corporations, are generally required by federal law to prove that their products benefit consumers. “Those statutes have language in them which makes it clear that credit unions are focused on giving the best rates possible,” Hunt explains. “For instance, on the federal side, credit unions have a usury ceiling so they can only charge rates up to a certain level.” (FYI, that limit is usually 15%, but has been temporarily raised to 18% by the National Credit Union Administration board.)

Additionally, a regulation called the member-business loan cap stops credit unions from lending more than 12.25% of their overall assets to businesses without rationale. This is an important protection for members. “The focus on consumer lending ensures credit unions remain primarily oriented towards serving the personal financial needs of their members, which again can lead to more consumer-friendly loan products,” Murdoch says.

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