Did you know that there are over 5200 credit unions in the US? Yes, you read it right. The Americans seem to like the ‘other financial institution’ quite a lot. A credit union is not like a bank. However, it provides similar services and solutions to its loyal members. To know more, stick right here with the discussion.
What is Credit Union?
A credit union is a cooperative financial institution that is small to medium size in scale and provides banking services and solutions to its members.
A credit union doesn’t target financial progress or profit. The core motive of this institution is to make financial contributions for its members. The catch of the institute is that not anyone can enjoy or contribute to the venture.
Only members that are enlisted in the union can enjoy the facilities and services. This financial institute offers financial services that are identical to those in banks, but in cheaper interest and service rates. The members of a credit union share the same motive and social platform.
7 Principles of Credit Unions
The seven principles of Credit Unions ensure the stability of the institute itself. As credit unions focus on helping their people rather than making money, it is very crucial to conduct operations in a timely and just manner.
The first objective of this union is that it is maintained and owned by its members. So, the principles of the credit unions ensure proper procedure, maintains integrity and autonomy, and last but not the least, maintain the harmony and financial stability of the community.
You will get to know more once we break down all the 7 principles of the credit union.
Principle 1: Voluntary Membership
The first thing that you need to understand about this particular financial corporation is that these are not-for-profit organizations. That means credit unions don’t target profit, rather they tend to serve their members.
Now, when it comes down to membership, anyone, despite their gender, social, religious, or political differences can become a member. The members have to work as volunteers in cooperative organizations.
But that doesn’t mean that anyone from anywhere or any field can become an active member. However, members usually come from a relative field of interest. The board is also elected from the active members and all of them work voluntarily to ensure structural integrity.
Principle 2: Democratic Control
As the financial institution is owned by all of its members, so the decisions always come from a democratic infrastructure. ‘One member, one vote’ is the main goal to achieve democratic member control in the particular corporation.
Principle 3: Economic Participation
Now, for other profitable organizations, the stakeholders tend to have active participation in the economic structure. However, as this particular cooperative organization is managed and run by all the ‘members’, the economic stance of the members is more in proportion rather than stakes.
To clarify more, members participate actively in arranging the capital. Instead of making large profits, they seek services and proportions from the capital in the form of services and solutions. These services come at cheaper rates and more sustainable return policies.
Principle 4: Autonomy & Independence
Cooperative organizations like credit unions are always great examples of autonomy and self-run infrastructure. These organizations are managed and owned by their members where every member has a voice.
Even if a credit union ties up with other organizations and financial institutes to raise capital, the integrity of the board remains autonomous and independent.
Principle 5: Training and Access to Information
One of the biggest features of a credit union is it ensures proper education and training for their fellow members. To run an organization, you need people with skills and proper education and skills.
As members are not typically finance experts, so the credit unions offer their members, employees, and other board members training and other facilities to ensure proper literacy in finance.
Principle 6: Cooperation among Cooperatives
End of the day, the main motive of organizations like credit unions is to strengthen a cooperative mindset. Hence, it encourages the members to work together through all platforms like local, state, regional, and international structures.
Principle 7: Concern for Community
Credit Unions are crucial financial corporations behind building a better community. They not only strengthen their members but also does a lot to get the community on a progressive march. They help the community to improve important sectors like education, housing and safety, and more.
Products of Credit Unions
Credit Unions are like a bank, despite being not-for-profit organizations. They provide a wide range of services and products that you can find in a typical bank. However, the real benefit is that these services and products come with a lot cheaper charges.
Here are 6 of the products that a credit union offers to its members:
Checks and Credit Cards: Credit Union provides a wide range of credit cards and accounts for its members. You can easily find convenient ATMs around the States. However, despite being very affordable and offering cheap transaction rates, you can’t find more ‘mortar and brick’ outlets of this financial institute.
Savings Account: A member of a credit union can easily open a savings account in the union. The interest rates are not that high, however, it is very convenient if you want faster transactions. Credit unions tend to encourage their members to save more money in their saving accounts.
This motivation also encourages the members to save more funds. This is very crucial for the community and the individual’s financial wellbeing.
Consumer Loans: Perhaps this service is the biggest advantage of a credit union. Now, like banks, not all eligible people can apply for a loan in a credit union. Only the existing members of the union can ask for a consumer loan.
Not only that, as a member, you will be able to apply for a loan in a hustle-free procedure. If you think that’s it, then you are wrong. Banks and other financial institutions charge a fat amount of interest over the sanctioned loan.
However, as credit unions are not-for-profit organizations, they offer a much less interest rest. Thus, the recovery percentage is also better than other financial corporations. The main motive of consumer loans offered by the unions is to make a sustainable and reliable financial relationship between the members.
Money Transfer: Every year, millions of US dollars are being sent to people, friends, family, and associates. Legal ways like money transfer are a popular service in financial institutes like banks and credit unions.
You can easily transfer money to your friends and family pretty easily. Not only that, the fees and other costs regarding the services in credit unions are very low in comparison to banks and other financial corporations.
Online Banking: Online or Mobile banking has now become essential for people. Walking down to the bank and getting your work down is so yesterday’s news now. With the help of the internet and technology, you can easily settle down your finance from anywhere in the world.
Credit unions mainly rely on online banking solutions. As they don’t have physical outlets in large numbers, online banking allows their members to meet up their financial needs now and then.
Mortgages & Home Loans: Credit unions also offer various loans like home loans, business loans, and mortgage loans. Suppose you have a property that has a significant value in the market. You need an amount of money as a loan, to settle down your affairs. In such cases, you can give that property to the union as a mortgage and take a loan.
Upon returning the loan, you will get your property back. The union also holds the right to sell or acquire the property to salvage the loan if in any case, you fail to return it.
In-home loans, suppose you are thinking of buying a new house and you are short of funds. In such cases, if you are a member of the union, you can easily apply for a home loan with an easy and flexible return policy.
How Does a Credit Union Make Money?
You might be wondering how the credit union generates income. We have already stated that the credit union is not just a typical financial institution. It is more like a not-for-profit cooperative financial institution that prioritizes the financial needs of its members.
Now, a typical bank generates a hefty amount of profit by providing its clients with services and financial solutions. Some financial institutions directly invest in other ventures to generate revenue. However, as the banks are profit-minded organizations, they have to pay federal taxes.
But, credit union follows a different strategy altogether. As they are not-for-profit organizations, they are not entitled to pay federal taxes and sorts. So, they can charge their member lesser than banks and other financial institutions, also gaining a good profit to run operations.
Advantages and Disadvantages of Credit Unions
There are many advantages of credit unions. But that doesn’t mean that it doesn’t have any dark sides. We will be looking into both sides of the coin to examine the advantages and disadvantages of credit unions.
Advantages of Credit Unions
Here are the 3 Advantages of Credit Unions:
Membership & Ownership: Every member of the Credit Union is an owner of the institution. That means unlike being treated as a consumer, you have the rights of an owner.
Better Offers & Rates: As credit unions are not-for-profit organizations, they don’t have to pay federal tax. So, they can offer you cheaper return rates in loans as well as good interest rates in other services.
Serving the Community: A credit union not only oversees the financial requirement of its members but also works to improve the community. Ensuring goodwill in various sectors of the community, credit unions are considered to be a vital part of a community’s welfare.
Disadvantages of Credit Unions
Here are the 3 disadvantages of Credit Unions:
Membership Payments: If you want to become a member of a credit union, you will have to pay a membership fee. On the contrary, the membership fees are pretty affordable.
Fewer Outlets: As credit unions are not as accessible as retail banks, commercial banks or investment banks, they have limited outlets for their members to conduct in-person interaction. So, if you are looking for offline services within your reach, you might find it hard to fulfill. You can find the differences between retail banks and commercial banks here.
Not All Credit Unions Are Insured: Yes, this is correct. Even if you are a member of a credit union, you still have a risk of losing your money if it is not insured.
Federal Credit Unions are insured by the federal government whereas others may be ensured by NCUA. Banks are typically insured FDIC. So, do a bit of research before investing in a particular credit union.
How is a Credit Union Different from a Bank?
In straight-up answer, a credit union is a not-for-profit cooperative financial institution where the members of the union get to enjoy a series of financial services and solutions.
Whereas, banks are profit-minded financial institutions that offer their clients various financial solutions and services.
Banks are subjected to making a profit out of their services and solutions. Whereas, credit unions are designed to provide financial assistance to people sharing a common bond. The revenue generated in the union is either repayment or dividend from the members.
In banks, anyone can avail of such services if he or she is eligible. However, in credit unions, only the members can avail themselves of such services.
Who uses Credit Unions?
People with a common bond, sharing the same motives use credit unions. They can be employees of a company, belong to a specific community, veterans, or come from a similar religious faith. As long as the members are in good books, the credit union will serve the community.
Final Thoughts
Credit Union has become very famous in recent times. According to research, almost 90 million Americans are now members of credit unions.
Credit unions hold a vital position in building a community. They share brotherhood values to keep the community intact. Such financial condition is very crucial to maintaining the financial sustainability of the national economy.
Reference Links
- https://www.investopedia.com/terms/c/creditunion.asp
- https://www.pscu.ca/Home/YourCreditUnion/CooperativePrinciples/
- https://www.mycreditunion.gov/about-credit-unions/products-services
- https://money.howstuffworks.com/personal-finance/banking/credit-union.htm
- https://moneyinc.com/the-pros-and-cons-of-credit-unions/
- https://www.forbes.com/advisor/banking/difference-between-bank-and-credit-union/
- https://www.investopedia.com/credit-unions-vs-banks-4590218