Don't Overlook Your Local Credit Union
Comparing banks and credit unions can be somewhat like comparing David and Goliath. In 2013, banks held over fourteen times more assets than credit unions ($14.7 trillion vs. $1.1 trillion). Each of the U.S.'s four largest banks is actually larger than all of the credit unions combined. But although credit unions are small, they're growing rapidly. In fact, credit union loan growth in 2013 was the highest it's been in the last 5 years, growing 7.3% year over year, with credit unions surpassing 100 million members. Credit union's growth--in members, loans, and deposits--has been constant even during the financial crisis, possibly in response to grassroots movements to support credit unions.
But what exactly is a credit union? Credit unions are not-for-profit financial cooperatives, serving members who share something in common: such as employment, association, or residence in a particular area. Non-profit credit unions generally offer better savings and loan rates, and low or no fees. For example, as of March, the average rate on a 36-month new car loan was 2.76% at credit unions and 5.43% at banks. Credit unions are usually smaller operations than the big banks and are able to pass on these savings to customers.
Despite the practical benefits of credit unions, their relatively smaller size can make them seem more vulnerable to going under. However, credit unions have shown that they are actually exceptionally sound partners for borrowing and saving.
How Sound Are Credit Unions?
Credit unions are remarkably secure. For example, in the onslaught of the financial crisis of 2008, the rate of commercial bank failures was almost triple that of credit unions (60% to 23%)
And, credit unions have grown even healthier since the credit crisis. Credit unions are regulated by the National Credit Union Administration (NCUA), which oversees the safety and soundness of all credit unions. Since the credit crisis, the NCUA has strengthened its oversight, and money has poured into credit unions as depositors leave big banks, increasing by $41 billion in 2011.
Similar to FDIC for banks, federal credit unions have their own insurance fund. All federal credit unions are insured through the NCU Share Insurance Fund, which is backed by the full faith and credit of the U.S. government. State-chartered credit unions may be insured by the NCUSIF, or might have their own state insurance or private insurance. Unlike banks, which can raise capital by issuing bonds or selling shares, a credit union can only raise capital by retaining its own earnings, a strategy widely regarded as a source of stability by regulators. A bank answers to its shareholders, who want profits. A credit union answers to its members, who want lower rates and better service.
In addition, credit unions don't pay taxes on the money they make on loans, and they are actually more transparent than banks. Credit unions hold open annual meetings, issue annual reports and even post financial statements every month to further reassure their members to the financial health of the union. For these reasons, and many more, American credit unions are widely regarded as safe and sound.
How to Find a Credit Union
Joining a credit union can be easier than joining a gym. For example, even if you're not an astronaut, you can get a car loan from NASA Federal Credit Union by joining the National SpaceSociety, a nonprofit group, for just $20. Most people qualify to be a member of a credit union based on the community where they live, where they work or go to school or through a family member.
The NCUA website or Bankrate's Safe and Sound page are both good resources to check up on your credit union, make sure it's federally insured by the NCUA and look at its finances. MyCreditUnion.gov is another user-friendly government website where you can search for a credit union based on location and do more research on a credit union's financial soundness. Online credit union searches like aSmarterChoice.org let users search based on location, affiliation and by name and make it easier than ever to find a credit union that is right for you.
Despite their small size, the nation's 7,000 credit unions can be an attractive safe haven for borrowing and saving. Be sure to explore all of the options available to you, including credit unions. For their small size, credit unions are definitely a safe and sound financial partner.
VINCE PASSIONE | Columnist
Vince is the founder and CEO of LendKey, driving the vision and strategy for the company while overseeing the executive management team. LendKey is a cloud based technology platform that enables any lender or investor to quickly, efficiently and securely create a customized lending program and build a portfolio leveraging LendKey’s marketing & operations services.