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Why Do Credit Unions Offer Better Rates Than Banks?

Why Do Credit Unions Offer Better Rates Than Banks?

Credit unions have more than 130 million members across the US, and they continue to entice more consumers to join their financial cooperatives because of the benefits that they offer. Apart from the minimal fees, the credit union interest rates make them a better choice for individuals opening accounts and looking to take advantage of other financial products.

Let’s explore the definition of interest rate, how it works, and why credit unions are able to beat the terms set by traditional banks.

What Is an Interest Rate?

  • It is the cost being charged for borrowing money.
  • It is the payment received for depositing or lending money
  • It is, essentially, “the price of money.”

How It Works
With a deposit account, the interest is what the financial institution is “paying” the account holder to have that money at said institution. In turn, the organization lends that money to someone else and charges them interest. It will charge a higher rate for that loan than the deposit to cover operating costs.

Let’s say you get a $20,000 automobile loan for 60 months with an interest rate of 8.99%. If you pay only the minimum amount due for the duration of the loan, the “cost” of that $20,000 loan will be $4,908.07 in addition to the original $20,000 you used for the purchase. This is why understanding the “price of money” is important to your finances.

Factors Why Credit Union Interest Rates Are Generally Lower

  • Both banks and credit unions must make money to cover operating costs.
  • Banks have shareholders—a small group of investors who own stock in the business. In return for their investment, dividends, or a portion of the profits, are paid back to shareholders regularly throughout the year. In 2023, a record high of $1.66T of global dividend payouts were paid to bank shareholders.
  • Credit unions have member-owners, not shareholders. Everyone with an account is an owner. The profit is “paid” back to the membership through lower rates on loans and higher rates on deposits.
  • A bank is a for-profit corporation and is taxed, whereas a credit union is not-for-profit and has a federal exemption on corporate income taxes. However, credit unions still pay property, sales, and employment taxes.
  • As a not-for-profit entity, a credit union cannot be privately owned, issue stock, or have its board of directors personally benefit in any taxable way.

How Are Interest Rates Determined?

  • The Federal Reserve raises or lowers short-term interest rates to maintain stability and liquidity in the economy.
  • Supply and demand for loans and credit will also cause rates to adjust. High demand for borrowing will cause interest rates to rise. Low demand for borrowing will cause interest rates to fall.
  • The demand for 10- and 30-year US Treasury notes also affects long-term interest rates. Higher demand for these results in lower interest rates, whereas lower demand leads to higher interest rates.
  • The last determining factor is that financial institutions set their rates based on the combined factors of market conditions, business needs, and customer/member profiles.

Compare the Current National Average Rates

Credit Union and Bank Rates 2024 Q1

Enjoy the Benefits Offered by Credit Unions

Join Heartland Credit Union today and become a part-owner of a not-for-profit financial cooperative. You can choose from various financial products that both traditional banks and credit unions offer, which include savings accounts, auto loans, mortgages, and more. For more information, feel free to get in touch with us.