Do Credit Unions Offer Better Car Loans?

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Are you thinking about buying a car? If so, you've probably started investigating the interest rates on auto loans from banks and dealerships. But there's a third option for financing your purchase that you may not know about: credit unions.

Like banks, credit unions offer savings and checking accounts, loans and other financial services. Unlike banks, credit unions are not-for-profit organizations owned by their members. Instead of charging members fees to use its services, a credit union gives back to its members by offering them higher rates of return on savings and investments—and lower interest rates on loans.

What Makes Credit Union Auto Financing Different?

When it comes to financing your car, there are several benefits of using a credit union, as opposed to a dealership or bank.

  • You may have a better chance of getting approved for a loan. Because they are smaller, focused on their communities and owned by their members, credit unions tend to be more understanding of members who have less-than-perfect credit scores. This can make a credit union a better option than a bank if you have poor credit or have a thin credit file (few or no credit accounts and a limited credit history).
  • Credit unions generally offer lower interest rates than banks or auto dealerships. Because credit unions aren't profit-focused the way banks are, they don't need to make as much money on your loan. The average interest rate for a 48-month new car loan from a credit union was 3.75% in March 2019, compared with 5.03% for the same loan from a bank, according to the National Credit Union Administration.
  • Banks and dealerships typically require you to take out a minimum auto loan amount. Credit unions often have lower minimum loan requirements or none at all. For instance, a $5,000 loan to buy a used car might be too small for a bank to finance, but not for a credit union.

There are also a few downsides to financing a car through a credit union.

  • You have to be a credit union member to apply for a loan. If you're already a member, that's not a big deal. If you're not a member, chances are there's a credit union you could join. You may be able to join a credit union based on your employer; your geographic location; or membership in a place of worship, school or homeowners association. There are credit unions for government employees, union members, teachers, firefighters, members of the military or military veterans, postal workers, and faculty and employees of colleges and universities. Plus, most credit unions allow members' family members to join too. If your mom belongs to a credit union for school teachers, you can join even if you're not a teacher. You can use the National Credit Union Association (NCUA) Credit Union Locator to find credit unions that may be open to you.
  • Smaller credit unions usually don't offer all the bells and whistles that bigger banks do. For instance, a credit union may not offer online banking or a mobile banking app, may not have ATMs and may have only a few branch locations. This can be inconvenient if you're using a credit union for your daily banking needs, but if you're using a credit union primarily to get an auto loan, it shouldn't be a major problem.

What Credit Score Do I Need to Get a Car Loan With a Credit Union?

Using the FICO® Score credit scoring model, a credit score of 669 or less is considered fair or poor and can make it difficult to get a car loan from a bank or auto dealership. However, when you apply for a car loan from a credit union, a poor or fair credit score isn't necessarily a dealbreaker.

As member-owned institutions, credit unions can focus more on helping their members than on making a profit. That means they're usually more flexible than banks or car dealerships when it comes to approving loans. (Even at a credit union, however, a better credit score still translates into better loan terms.)

When Does It Make Sense to Finance a Car Through a Credit Union?

When should you choose credit union auto financing instead of getting a loan from a bank or auto dealership?

  • If you're just beginning to build credit, have fair to poor credit or have a thin credit file, a credit union may be more likely to approve you for an auto loan than a bank or auto dealership.
  • If you already belong to a credit union, it makes sense to see how their loan terms compare to those of banks or dealerships. Getting preapproved for an auto loan from your credit union before you visit the dealership can give you more negotiating power.
  • Managing an auto loan from a credit union can be less convenient than managing a loan from a dealership or bank. If the credit union doesn't have online banking options, for example, you'll have to mail in your loan payments by check. The trade-off is a lower interest rate on your loan. If being able to make your loan payments online, use a mobile app to check your loan balance, or easily visit a bank branch is really important to you, look for a credit union that offers these amenities.

Get the Best Auto Loan for Your Credit Score

When making any financial decision—including taking out an auto loan—you should always explore all your options. Checking your credit score from Experian before applying for a loan will help you choose the best lender for your needs, whether that's a bank, an auto dealership or a credit union.