However, there’s a third option that doesn’t get nearly enough attention: the credit union.
Credit unions may actually be the best source for an auto loan. In fact, they may be so good that it’s worth opening up an account with one, even if only to take advantage of the loan.
Here are a few reasons why this is true.
A Customer At the Bank, An Owner At the Credit Union
When you open up an account with a bank — whether it’s a checking or savings account or a loan of any type — you’re a customer of the bank. While that’s not a bad position to be in, it hardly qualifies you as an “insider” in the organization. That means that you have to go through the normal protocols when handling your accounts or opening a loan.
The arrangement is very different when you work with a credit union. Credit unions are owned by their depositors. Opening an account is usually a starting requirement. But once you do that, you become a shareholder in the institution.
That means that you are an owner at a credit union and not just a customer.
Since credit unions are customer-owned, they don’t have to worry about paying dividends to third-party stock investors. They are also non-profit, so they also don’t try to nickel-and-dime you every chance they get. The depositors in a credit union are its owners. So the people running the credit union make every effort to provide financial benefits for you.
That means you get higher rates on savings accounts and lower rates on loan accounts.
Credit Unions have Lower Rates on Auto Loans than Banks
That last point gets to the heart of why credit unions may be the best source for an auto loan. You can almost always get a lower rate on an auto loan at a credit union than you can at a bank or another source.
According to the National Credit Union Association (NCUA.gov), average loan rates for credit union and bank auto loans looked like this (as of March 31, 2017):
|Institution/Loan type||Credit Unions||Banks|
|New car, 60 months||2.78%||4.69%|
|New car, 48 months||2.66%||4.58%|
|Used car, 48 months||2.86%||5.09%|
|Used car, 36 months||2.74%||5.04%|
Notice that the rates charged by credit unions on new cars are almost two full percentage points lower than what banks charge on loans of the same term. And credit union rates on used cars are roughly 2.25 percentage points lower than banks.
On a $20,000 new car loan with a 60-month term, the monthly payment for a credit union loan at 2.78% would be $357. But the same auto loan with a bank at 4.69% would be $375. That means that you can save $18 per month, or $216 per year, by taking an auto loan with a credit union, rather than a bank.
On a $20,000 used car loan with a 48-month term, the monthly payment for a credit union loan at 2.86% would be $441. But the same auto loan with a bank at 5.09% would be $461 per month. That means that you can save $20 per month, or $240 per year, by taking an auto loan with a credit union, rather than a bank.
Credit Unions Tend to be More Flexible with Credit Issues
Another major advantage to being an owner at a credit union? You have a higher chance of getting financed if you have credit issues.
Credit unions often have lower credit score thresholds on their best loan rates. For example, the credit union that I belong to offers their lowest auto loan rates to those with credit scores as low as 650. In order to get a rate of, say 3%, at most banks, you would need to have a credit score in excess of 750.
The same is true with derogatory credit information. Since you’re an owner, a credit union will often try to work with you.
For example, let’s say that you have a couple of collection accounts outstanding on your credit report. A credit union may ignore the collections, as long as you pay them off. A bank might decline your loan application without considering the circumstances, forcing you to turn to a car dealer-supplied, subprime loan at a much higher rate.
Since the big banks tend to run national operations, you might be dealing with a lending department in Illinois, even though you live in Texas. Credit unions, however, are usually local affairs.
They are often set up based on geography. For example, a credit union may exist only in the state of Ohio. That means all of their operations will be in Ohio. If that’s where you live, you’ll always be able to deal with the local branch for your loan.
That’s almost never true with national lenders.
Resource: How to Find the Best Mortgage Lender
A Personal Experience with Credit Union Auto Loans
My son purchased a used car less than two years ago. He was 21 and had no credit, so the dealer put him into a subprime car loan at an interest rate of nearly 23%.
Since he needed a car quickly, he took the loan. We also felt it was an opportunity for him to develop a credit history (albeit an expensive way).
Well, mission accomplished! A few weeks ago, he applied for a refinance with our credit union and was approved for a rate of just over 3%. The credit union approved his loan, primarily on the strength of his less-than-two-year payment history on the original loan.
The credit union was unable to work with him two years earlier, since he had no credit history whatsoever. But on the strength of a relatively thin credit history, they approved his refinance at a very low interest rate – particularly since it’s on a used car.
Learn More: How to Refinance Absolutely Any Debt
That’s the kind of flexibility that credit unions offer, and it far outshines a dealer loan or the vast majority of those through banks. That’s the reason credit unions may be the best source for an auto loan.
If you’re looking for better interest rates, a more personalized touch, and even a little extra understanding for credit blips, you’ll want to look into a credit union for your next auto loan!