Why are Credit Unions Better than Banks in Auto Loans?

5 Reasons to Opt for Credit Union Auto Loans

Credit unions and banks offer different opportunities for their clients – especially when it comes to getting an auto loan. Though both institutions may be able to get a borrower financed, they take different approaches and approve different borrowers.

If you have bad credit, you may want to weigh your options particularly carefully. When it comes to credit unions for your next car loan, you could be in for a big saving over choosing a bank. Let's take a look.

Lower Interest Rates

When you're a member of a credit union, you're usually entitled to the perks that come with being a credit union member, like lower interest rates on loans, including auto loans. Auto loans average around a 4.5% interest rate at many credit unions, while banks tend to see higher APRs of around 6.5% or more.

The reason for this difference in interest rates? Banks are for-profit institutions and need to make money for their shareholders. Credit unions are not-for-profit organizations that don't have the same oversight and credit union car loan requirements may not call for as high of a credit score. This means lower interest rates on things like credit cards and loans as a lower credit borrower. Customers who generally have an easier time getting a car loan at a credit union usually have to go in person to do so.

Better Terms and Flexibility

Auto loans that come from credit unions typically have more flexibility when it comes to loan terms and potentially working with you if something should happen to make payments difficult. They may also offer you shorter terms than a bank for repayment options.

Personalized Customer Service

Credit Unions are also known for their personal and personalized service. When you're a member of a credit union, you belong, and the company is not out to simply make a profit out of you. Credit unions are typically smaller organizations than banks, and they're member-owned. This makes credit unions non-profit organizations, which allows them to focus more on the customer experience. They are known for doing this with personal service, low costs to open accounts, and minimal fees.

Easier Approval Process

The approval process at a credit union is also a bit more personable, and credit union car loan requirements include a look at your overall finances and credit situation, not just a glance at your credit score. Banks are more strict and tend to only work with borrowers who meet certain criteria, like a higher credit score.

Lower Fees

Credit unions typically don't charge as many fees as banks. Banks typically charge origination fees, prepayment penalties, and late payment fees. Credit unions on the other hand, typically charge little to no origination fee, and don't charge a prepayment penalty. Their late payment fees are typically around half that of a bank.

How Credit Unions Can Help Save Money?

Imagine you're in the market for a new vehicle, and you're looking to get pre-approved with a bank or credit union.

If you want to finance the purchase of a $25,000 new car with a loan term of 5 years or 60 months, this is a scenario that you might encounter:

• If you were to take on a loan from a bank at 6.5% APR for 60 months, you'd be looking at a monthly payment of $487.56 and would pay $4,253.60 in total interest charges over the life of the loan.
• A credit union may charge you less if you're a member in good standing. Let's assume you get a lower rate of 4.5% from your credit union. In this case, you'd pay $471.78 a month for your loan, and pay a total of $2,306.80 in interest charges over the loan term.
• Your total savings in this example is $1,946.80, just by financing through your credit union. Your costs will vary, but this is an example of how you might save money at a credit union when you finance a vehicle.

How to Apply for a Credit Union Auto Loan?

In order to apply for an auto loan at a credit union, you have to be a member of that particular brand of credit union. Because credit unions are member-owned, there's usually a requirement for eligibility – not everybody can just walk in and open an account. Credit unions typically require a certain organizational membership, occupation, or location in order to be a member, such as military service, state government service, being a plumber, being a teacher, or living in a certain community, can all be ways to get into a credit union. In recent years, many credit unions have begun to relax these regulations and it’s easier to qualify for membership.

If you're not a member, your first order of business should be to research credit unions in your area and see if any are a good fit for you.

After that, the process of applying for an auto loan at a credit union is pretty straightforward. It's a good idea to know where your credit stands before you take on a car loan, so check your score and reports. Even though credit unions are more lenient with credit scores, a really low score won't do you any favors.

You must provide the lender with proof that you can fulfill your loan obligations, show proof of residence, and proof of identity, and present them with the approximate price for the vehicle you're purchasing. Once you're approved, the lender will typically cut you a check for the amount of the loan and you can shop like a cash buyer. Sometimes, they'll instead send the exact amount to the lender once you're approved.

Some credit unions also allow you to get a pre-approval, which will allow you to see if you qualify for an auto loan, and for how much. This will make shopping for cars in your budget easier. You can typically apply online or in-person at a credit union, and if you're struggling with your credit, it might be wise to go in person, with all your documentation in hand.

Are Credit Unions Better Than Banks?

In many cases, a credit union may be a better option than a bank for consumers' financial needs. With many people struggling to hold on to as much of their hard-earned money as possible, paying unnecessary fees at a bank isn't high on most people's priority list. Instead, they want a better experience and to get the most from their money.

Credit Unions aren't necessarily better than banks, though there can be many perks to being a credit union member. These days, with prices on the rise, many people are trying to hold on to as much of their hard-earned money as possible. For many, this means paying unnecessary bank fees isn't high on their priority list. Instead, they want to get the most from their money, and this often means choosing a credit union.

Credit unions can often be a good place to start building your financial life if you qualify for membership, and are also seen as a good option for bad credit borrowers who are members in good standing.

When it comes to getting an auto loan, Experian's State of the Automotive Finance Market report for the third quarter of 2024 shows that credit union lending has taken a dip over Q3 of 2023, providing 21.15% of all auto loans. This is down from 23.05% in 2023. That slump shows that credit unions aren't an option that customers are taking advantage of, which could be a mistake.

The Bottom Line

When it comes to getting a car loan with bad credit, there are typically a few options, though they will cost you more in interest than a borrower with better credit. If you're a member, a credit union is typically a good first choice to look for pre-approval when you need a loan.

However, since no loan is a guarantee, another good choice is to shop with a dealership that works with subprime lenders. Subprime lenders are typically indirect lenders that rely on factors beyond credit to approve applicants, such as income, employment history, and residence stability. These are lenders that work with borrowers who have lower credit scores – subprime credit is typically described as a FICO credit score of 670 or below. While you usually can't approach a subprime lender directly and apply for a loan, they lend through certain car dealerships. So, the key to getting financed with a subprime lender is applying with a dealership that works with them.

If you're unable to qualify for a subprime loan through a special financing dealership, you can also opt to look for a vehicle through a buy here pay here dealer. These are in-house lenders that both sell and finance the car.

BHPH dealers only offer used car loans, but it can sometimes be the way to go if you're struggling to get approval due to credit issues. Since an auto loan can help build credit, it's important to make sure the BHPH dealer reports payments to the credit bureaus. Not all of them do, and without proper reporting, your credit score can't improve.

If you don't know where to start your search, we can help. Auto Credit Express works with a large network of special finance dealerships that are signed up with subprime lenders. We can connect you to a dealer near you to start your journey to your next car loan. Start your search with us today.