Credit Unions Versus Banks

Author: BankFeeInsider.com     Thursday, February 20, 2014 12:00 AM

Banks and Credit Union -- Same on the Outside, Completely Different Inside

Most people do not have a clear understanding of the differences between banks and credit unions, primarily because they do not understand what a credit union is. If people did understand the difference between a bank and a credit union, far more people would attempt to do their ''banking'' at a credit union.

Biggest Difference: Interests

A bank is a for-profit business which means that it's primary objective is to generate money. The implications of that business model tend to mean that the bank's interests come first, the client's interests come second, sometimes, a distant second.

A credit union is a not-for-profit organization. That means the primary objective of a credit union is to appease the customer. However, the fact that a credit union is not-for-profit is not the only factor that drives customer relations.

A credit union is owned by the customers. Every customer has a vote -- regardless of how much money they have in the credit union -- and that vote is used to select the board of trustees. In other words, the customers are also the bosses.

But, there is an even greater incentive for a credit union to please the customer aside from the fact that the customers are the bosses. The customers are also the owners of the credit union. That means that a not-for-profit business is owned and operated by its own customers.

Consequences of For-Profit Versus Not-for-Profit Banking

While it is easy to understand why a credit union puts customers first, it's not so evident as to how they do so. In order to understand what a credit union does in order to best serve their customers, it is important to understand what for-profit business practices banks use to generate income.

Banks

Banks must pay both the employees and the board of trustees. In addition, they need to pay for overhead costs. In order to generate the income required to cover these costs, they loan money out at the highest possible interest rate.

In addition to loaning out money at the highest rate of interest possible, they also try to loan out as much money as possible. The greater the sum of money, the more interest it accrues. These two practices lead to two results, predatory lending and a focus on corporate and commercial borrowers.

In other words, banks do not have a great deal of incentive to loan small amounts of money in the form of personal loans, small business loans, home loans, car loans etc. and they have very little motivating them to lend their money at low interest rates.

Credit Unions

Credit Unions, on the other hand, only need to generate enough money to pay the staff and overhead costs. The board of trustees of a credit union are volunteers. Additionally, since a credit union is not-for-profit, there is no incentive to seek corporate and commercial borrowers. That means a credit union's focus is on the small customers that comprise the union.

For the customer, that means smaller amounts of money can be borrowed and at lower interest rates.

 

 

Source: BFI