4 Reasons to Get a Car Loan from a Credit Union

Quick Answer

Credit unions offer many of the same services as banks, including car loans with lower average interest rates. A credit union car loan may be an especially good option for people who are just starting to establish credit, or who have lower credit scores and are trying to rebuild.

Young african american couple driving in car, travelling together

With the average price of a new car hovering around $45,000, finding an affordable auto loan is critical. If you've been searching for the best interest rates and terms, chances are good you've come across auto loans from credit unions.

Credit unions are not-for-profit financial institutions that function very much like banks. According to the Credit Union National Association (CUNA), about a third of all car loans originate with credit unions. Credit union car loans often give bank and dealer loans a run for their money, with low interest rates and money-saving options for people with low credit scores.

If you're in the market for an auto loan, here are four reasons to consider choosing one from a credit union.

1. Lower Rates

Credit unions are member-owned, not-for-profit financial institutions. Their core mission is to improve the financial well-being of their members. Among the key benefits they offer are higher rates on savings, minimal fees on loans and accounts, and lower rates on loans and credit.

Compared to banks and finance companies (including dealer financing), credit unions typically offer lower average interest rates across a range of credit scores. Here's how median interest rates stacked up for 72-month car loans based on April 2023 data from CUNA.

  • Credit unions: 6.58% to 10.86%
  • Banks: 7.51% to 17.11%
  • Finance companies: 6.23% to 17.94%

For all lenders in the survey, interest rates go up as credit scores drop. Median credit union rates compared favorably (or at least competitively) across all credit profiles, but were substantially lower for deep subprime and subprime borrowers, who generally pay the highest rates on loans.

The survey defines deep subprime borrowers as having VantageScore® credit scores below 580; subprime borrowers range from 580 to 619. On a 72-month, $40,000 loan, a deep subprime borrower saved $9,633 over the life of the loan on an average credit union loan versus an average bank loan, according to CUNA data. For a subprime borrower, the life-of-loan savings was $7,384.

Of course, average rates are not as important as individual rates when you're shopping for a loan. You may, in fact, find your best deal at a bank or dealership. But if you're investigating all of your options, you may not want to overlook credit unions. They sometimes have the rates to beat.

2. More Flexible Requirements

Even though credit unions check your credit and debt-to-income ratio when you apply for a loan, many will also take your larger financial history into account when considering your application. They may also offer specific loans and credit-builder programs that can help you secure a loan, even if you're just starting to establish credit.

Here's an example: Many credit unions offer loans for first-time auto buyers who don't have extensive credit histories. Rates and terms vary from one credit union to the next, but in general these loans are designed to get new borrowers off to a good start.

3. Lower Loan Minimums

Say you're buying your aunt's mint condition 2009 hatchback for $4,500. Many auto lenders won't offer you a loan that small; it's not worth their while. Some credit unions offer low (or no) loan minimums, so you can finance a car you're buying at a great low price or minimize your loan amount when you only need to finance a small portion of your car purchase.

4. Local, Personalized Service

Credit unions pride themselves on friendly, in-person service. Their members-first philosophy also shows through in their loan terms and features. For example, many credit unions let you skip a loan payment if you're going through a difficult month (provided you contact them first). You'll make up your missed payment and pay interest on it at the end of your loan, but you won't suffer late-payment consequences to your credit.

As an additional perk, some credit unions offer car-buying services that make locating a vehicle and negotiating a price easier on you.

Frequently Asked Questions

  • Credit unions work almost exactly the same way banks do. At a credit union, you can open a checking or savings account, take out a car or home loan, get a credit card account, cash a check or use an ATM.

    To bank at a credit union and get a credit union loan, you'll need to become a member. Although some credit unions still serve narrowly-defined demographics—for example, employees at a specific company—many accept members who live in surrounding communities or who are eligible to join online. Each credit union has a unique field of membership. Though every credit union won't be a fit for you, there's almost certainly a credit union that will.

    Consider these two ways to find yourself a credit union:

    • Find a credit union loan you like, then ask about membership. The credit union's website should have details on who's eligible to join and how much membership costs. One-time membership fees of $5 to $25 are typical.
    • Find a credit union in your community, then check loan rates. Look for local branches in your neighborhood or use the National Credit Union Association's credit union locator to find credit unions you can join. Compare rates to see which credit union has the best loan options for you.
  • Follow these basic steps to apply for a loan at a credit union.

    1. Find a loan. Search for credit union auto loans online or use an online loan aggregator to compare rates. Many aggregators include loans from credit unions. Dealerships that partner with credit unions or a network of credit union lenders can also connect you with a credit union loan. Ask your dealer for more information if you're interested.
    2. Prepare your credit. Credit unions may consider factors beyond your credit score and report, but they typically will factor in your credit when you apply for a loan. You may want to check your credit score and credit report in advance to avoid surprises. If you keep a security freeze on your credit file, make sure you unfreeze your credit information with credit reporting agencies before you apply for a loan.
    3. Complete your application. You may be able to apply using the credit union's website, on the phone or at a branch location. If your car dealer works with credit unions, you may be able to apply for your loan at the dealership.

      Information you may need to complete your loan application:

      • Social Security number and date of birth
      • Government-issued identification (driver's license or passport)
      • Proof of income (pay stubs or tax returns)
      • Proof of insurance
  • Auto loans are available from a variety of lenders, including traditional banks, online lenders and dealerships. Any of these can be a good fit. Though incentives like 0% dealer financing became rarer during the supply shortage years of the COVID-19 pandemic, some dealers (and the manufacturers that back them) now offer rebates, cash back or other incentives to get you to finance through them.

    Getting the best auto loan usually involves a bit of comparison shopping. Check with your current bank, look online for loan options, consider credit union auto loans and see what your dealer has to offer, then choose the loan that gives you the best rate and terms.

The Bottom Line

Financing a car is a big deal. Whether you're purchasing a new vehicle or a used one, your car loan will likely be one of the largest loans you'll ever take out. A lower interest rate can save you thousands of dollars over the life of a loan. In addition, having a lender you can work with may make it easier to get approved for financing and pay off your loan successfully while building or maintaining good credit.

If you're in the market for a car loan, now may be a good time to check up on your credit report and credit score. Knowing your credit profile can help you identify which auto loans will work for you. If you need to improve your credit score, consider taking a few months to pay down debt and continue making on-time payments. When you're ready to move, explore all your loan options to get the best deal.