Do Credit Unions Offer the Best Auto Loan Rates?
Car buyers who want to finance their purchase have the option of visiting a local credit union rather than financing through the dealership or a traditional bank. Credit unions offer several advantages, such as the ability to personalize their offerings to the needs of the local community. There are also some potential drawbacks, however, such as a lack of promotions or financing specials that dealerships often run to draw customers.
A credit union is a financial co-operative that is owned by its members. Depositors have a share in a credit union's ownership and can vote on decisions that affect the company, such as electing a board of directors. Starting in the 1800s, credit unions evolved as a way for communities and organizations to come together and offer financial services to their members. Profits, rather than being distributed to shareholders as with a traditional bank, are used to fund initiatives that benefit the community. Consequently, credit unions are classified as nonprofits and do not have to pay corporate income taxes.
Some credit unions restrict membership to a specific niche, such as workers in a specific industry or members of a civic or fraternal organization. Others are more open with membership requirements, welcoming anyone from the local community. As nonprofit organizations that do not answer to shareholders, credit unions can sometimes offer cheaper loans to members. Moreover, because decisions are made locally, credit unions are less hamstrung by corporate red tape and more capable of negotiating financial transactions with customers on an individual basis.
Credit Union Car Loan Advantages
A credit union's auto loan rates are often lower than the rates at a traditional bank. Credit unions, which are typically housed in nondescript buildings in small towns and staffed by employees who do not draw outrageous bankers' salaries, tend to have less overhead than traditional banks, and they are less concerned with turning a profit. A credit union's primary objective is to serve its community, and one of the best ways it can do so is by offering loan products that help community members make major purchases at an affordable rate.
Credit unions have more leeway with making credit decisions on a case-by-case basis. Often, traditional banks are bound by credit standards that come from corporate offices in places such as New York or Chicago. A borrower who does not meet the bank's FICO or income requirements receives a flat denial and has no avenue to appeal his or her case. A credit union customer, by contrast, can sit down with the decision-maker – in many cases a fellow member of his local community or civic group – and explain the nuances of his or her credit report or job situation, often resulting in an approval that would have been a denial had this information not been discussed.
Credit Union Car Loan Disadvantages
Financing through a local credit union necessitates an additional step in the car-buying process. In addition to visiting the dealership and negotiating the terms of the car deal, the buyer must visit the credit union to obtain financing. For time-strapped buyers who want to make this process as simplified as possible, this additional step might be a hassle, particularly if the interest-rate savings are minimal.
Dealerships that offer financing do so through captive third-party lenders to which they broker loans. Sometimes, dealerships work with their lenders to offer financing specials to buyers with good credit. The terms of these loans can be as low as 0% for top borrowers. Additionally, some car salespersons work financing into price negotiations. Buyers who finance in-house, which results in the dealership making more money in commissions, receive an additional discount on the purchase price of the vehicle. Financing through an outside source, such as a credit union, might mean missing out on these specials.