Credit Unions & Low-Interest Personal Loans: How the 2 Go Hand-in-Hand

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A personal loan is a short-term loan from a lender that you pay back in monthly installments. The length of a personal loan varies as well as the interest rates for borrowing money. Unless your credit is strong enough to qualify for a 0% introductory credit card offer, a personal loan will often be your cheapest option for borrowing money. In fact, the Federal Reserve reports that the average personal loan interest rate is significantly lower than the average credit card interest rate, which was about 16.6% as of February 2020.

If you are new to borrowing money or looking for your first loan, your local credit union will typically be your least expensive option. Credit unions are members-only institutions that aren’t looking to profit from their customers, allowing them to offer lower rates and fees for the financial services and products they offer.

This guide offers you in-depth information about credit union personal loans and specific information about how they work, why they are often a better alternative source for personal loans, and what you need to do to qualify for a low-interest personal loan from a credit union.

How Does a Low-Interest Personal Loan Work?

A financial emergency, buying a big-ticket item, or planning an event are only a few reasons why you might need a personal loan. When you borrow money from a lender, you typically have to choose between a secured or unsecured loan. Lenders secure loans with collateral. For example, a mortgage loan is secured with a house. Most personal loans are unsecured and do not require collateral.

Personal loans have fixed interest rates for borrowers, which are typically based on your credit score, credit history, and current debt. Everyone wants the lowest interest possible on a personal loan but determining what a good rate is can be difficult. Loan interest rates also vary based on the purpose of the loan, the amount requested, and the length of the loan.

When you take out a personal loan, the terms of your agreement specify how often and under what conditions a lender can raise the interest rate and sometimes also specify the maximum rate. Although each lender is different, the Annual Percentage Rate (APR), which is your yearly cost for borrowing money, typically ranges from 5.5% to 30%, which sometimes includes a loan origination fee. Some lenders also offer discounted interest rates for automatic payment methods.

Benefits of Personal Loans from a Credit Union

When you need a personal loan, you can go to the bank, but you would miss out on all the perks of doing business with a credit union. Credit unions use their non-profit status to pass savings to their members. Some benefits of borrowing money from a credit union include:

Lower Interest

According to the National Credit Union Administration, a federal credit union cannot charge you an APR higher than 18% for the majority of loans they offer. Yet, the average APR for an unsecured three-year personal loan from a credit union is much lower. As of March 2020, the average rate was under 12%, and has been even lower in previous years.  Banks typically charge more for interest and some online lenders have interest rates over 35%. In most cases, you will find your personal loan interest rate will be lower at a credit union than other lenders, allowing you to save money and have a lower monthly payment.

Fewer Fees

Many lenders charge loan application or origination fees, which are included in the cost of borrowing money. These fees can be several hundred dollars depending on the type and amount of your loan. You can almost always be certain that credit unions will have lower or no origination fees. And, in many cases, you won’t have to pay application fees. Charging fewer and lower fees gives credit unions the opportunity to continue helping their members truly save money.

Flexible Terms

If you have good credit, you will likely get favorable loan terms such as a low-interest rate. Unlike many banks, credit unions have more flexibility and often work with those who have had past blemishes on their credit. Additionally, some credit unions provide personal loans to borrowers who have no credit history. If you join a credit union and remain a member in good standing, it’s very likely the credit union will work to find a way to borrow you some or all of the money you need.

How Do I Qualify for a Low-Interest Personal Loan from a Credit Union?

Even though credit unions typically offer lower interest rates and better terms for personal loans, you still have to qualify for the loan. Borrowing money from a credit union includes the following requirements:

Membership

Credit unions are nonprofit entities owned by their members. Before you can apply for a low-interest personal loan, you need to become a member of a credit union. This is done by meeting certain criteria, which vary among credit unions. Some credit unions accept members from a specific regional area, a specific workplace, or a specific industry. In many cases, immediate family members, such as kids and spouses, also qualify for membership. Joining a credit union typically means opening a checking and/or savings account and maintaining a minimal deposit amount.

Employment

Lenders like to see that those to whom they borrow money have steady employment to reduce the risk of lending. As lenders, credit unions typically want to see a person has been at the same job for at least a year. Yet, some credit unions might be flexible on this requirement, especially when you’ve been a member for a while and all you easily meet all other criteria. 

Income

You need to be able to provide your annual or monthly income to your credit union for them to approve a loan. You can expect they will have a look at your debt-to-income ratio to ensure you can pay back the loan. Your income and your debt-to-income ratio can impact the amount of your loan. Also, the number of gig workers and independent contractors continues to rise; self-employed workers sometimes have difficulty proving income because they don’t have a traditional pay stub. This is where the flexibility of a credit union can be beneficial. Most credit unions will help you find the best way to provide documentation for your income.

Credit Score

As with loans from other types of lenders, the better your credit score the higher likelihood you will qualify for a personal loan from a credit union and get a low interest rate. The average interest rate ranges by credit score for personal loans in 2019 were:

  • Excellent Credit Score (720–850), APR 10.3% to 12.5%
  • Good Credit Score (680–719), APR 13.5% to 15.5%
  • Average Credit Score (640–679), APR 17.8% to 19.9%
  • Poor Credit Score (300–639), APR 28.5% to 32.0%

In most cases, your credit union will want to see a credit score of at least 640 and at least three years of credit history to qualify for a personal loan. If your credit score is less than 580 or you have no established credit, you might have trouble qualifying for a conventional personal loan. Fortunately, many credit unions have other options. You might pay a higher interest rate, but it can help you get a great deal on your next loan if you make on-time payments.

Personal Loan Options at Credit Unions

Several types of personal loan options are available for members who want to borrow money from a credit union. The types available to you depend on the extent to which you meet all or some of the qualifying criteria discussed above. Below are some examples of types of personal loans you can find at many credit unions.

Special Rate Personal Loan

These types of loans are the gold standard at credit unions. Special rate personal loans have the lowest interest rates, which are fixed, for those with the best credit ratings. In most cases, you won’t have to worry about paying an annual fee or a prepayment penalty if you want to pay off your loan early. Additionally, you can borrow money for anything from planning a vacation to planning a wedding, buying a new television. Those who qualify for special rate low-interest personal loans can also consolidate debt from credit cards, car loans, and other debt with high-interest rates, resulting in lower monthly payments.

Credit Builder Personal Loan

Those who have little or no credit or have a less than desirable credit score will be best served by exploring a credit builder personal loan at their credit union. These types of loans focus on helping members build their credit history and increase their credit score, so they can reap the benefits in the future. Credit builder options can vary among credit unions, but typically they do not give you cash in hand. They are a secured personal loan. At Dane County Credit Union, we take the loan amount and place it in a certificate of deposit (CD) for a year, so you earn interest. You get an extremely low-interest rate on the loan. Once you’ve paid off the credit builder loan, you have increased your credit score and you have your original loan amount plus interest earned over the year.

Line of Credit

Many credit unions also offer personal lines of credit. A personal line of credit is an unsecured account that allows you to borrow money as you need it, instead of committing to one lump amount. You can transfer the funds you need to your checking or savings account. Another big difference between a traditional personal loan and a line of credit is that lines of credit have a variable interest rate, which means they can change from year to year. You can think of a personal line of credit with your credit union as similar to a credit card, only with much lower interest. Unsecured lines of credit are a risk for lenders, so even credit unions may reserve them for members who have well-established and excellent credit. In many cases, the line of credit is also attached to a member’s checking account to provide overdraft protection and easy access to money when necessary.

Secured Personal Loan

We have already shared with you information about a credit builder loan, which is secured with a CD, but you might also consider a standard secured personal loan. Securing a loan with collateral reduces the risk the credit union has to make when borrowing money. If a borrower doesn’t pay, the bank takes the collateral to cover some or all of their losses. Cars, trucks, boats, RVs, and other big-ticket items serve as collateral when you borrow money to purchase them. But, what happens when you want to borrow money for something else? You can offer your paid-off vehicle or some other item as collateral for a personal loan, but if your only purpose is to build credit, you can use your savings account to secure your loan. Your credit union will typically add a low interest rate to your savings rate and as you pay back your loan, you will increase your credit score.    

Contact Us Today to Discuss Your Personal Loan Needs

Many people consider national banks and expensive private lenders when they need to borrow money. Yet, if they knew the money they would save by getting a low-interest personal loan from a credit union, they would likely make a different choice. Dane County Credit Union has been serving the Greater Madison area since 1935.

Whether you want to build your credit, consolidate your debt, plan for an event, or ensure you have easy access to money, we have a personal loan to meet your needs. Our Member Services team would love to meet with you, help you set up an account, discuss your personal loan needs, and help you find the best low-interest solution. Contact Dane County Credit Union today online or at 800 593-3228

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Jen M.

Jen has been with DCCU since she graduated from UW Madison - a long time ago. As the Content Strategist she helps share all the amazing things DCCU does in our community and spreads the credit union philosophy of People Helping People. When she's not working for the best credit union in south central Wisconsin, she's busy with 4 kids and a feisty little dog at home. She formed her family through adoption and has a deep passion to support foster and adoptive parents and kids. Her favorite place to relax is poolside or in front of the fireplace.