How Do Credit Unions Make Money?
Credit unions are technically not-for-profit organizations, but they still need to make money to pay expenses. How does a credit union work?
March 28, 2022
Credit unions are a type of financial institution that provides banking services, loans and other related financial services. However, credit unions are substantially different from traditional banks.
Banks are private businesses set up to make a profit.
Credit unions, on the other hand, are not-for-profit organizations. They exist to serve their members and often offer cheaper services, better interest rates and other perks.
But how does a credit union work? If they’re not-for-profit organizations, how do they pay for their employees and other expenses?
How does a credit union work?
From a member’s perspective, credit unions work similarly to banks.
You can join, open a checking or savings account, get a debit card, write checks, take out loans and so on. Credit unions offer most of the same products and services as traditional banks.
The difference is in how credit unions are structured and what their goals are. So, how does a credit union work, exactly?
Credit unions are cooperative, member-owned organizations. This means that when you join a credit union, you technically become a partial owner in the organization.
As a credit union member, you’ll often enjoy perks not found when using a traditional bank. Credit unions typically:
Have lower fees (or no fees at all)
Offer lower interest rates on loans and credit cards
Pay better interest rates on deposit accounts (checking & savings)
Are local/regional and invest in improving their local communities
Whether you want a personal loan, a mortgage or you just want to earn interest from your bank deposits, credit unions offer significant advantages over traditional banks.
And the main reason is this: Credit unions aren’t set up with profit in mind. Instead, they exist solely to benefit their members.
Credit unions are not-for-profit organizations
It’s important to understand that credit unions are nonprofit cooperative organizations.
A credit union exists to serve its members. Many are run by a board of volunteers, and decisions are made with the best interest of credit union members in mind.
With that said, not-for-profit doesn’t mean that credit unions don’t make money. They certainly turn a profit — but the profit is returned to members in the form of lower fees, lower loan interest rates or higher rates on member savings.
We can think of it this way:
A traditional nonprofit charity relies on donations or grants to operate its services
A credit union generates revenue directly from its services and doesn’t rely on donations
Both are nonprofit organizations dedicated to a certain cause
Credit unions may have membership requirements
Here’s one last important thing to consider: Most credit unions have certain requirements for who can join. Some may only be open to:
Residents of certain communities
Military or former military members and their families
Employees of certain organizations and their families
If you’re looking into joining a credit union, check their membership requirements first.
How do credit unions make money?
Credit unions must still make money to pay their employees, build new branches and continue operating. But any profit they make after expenses is returned to their members in the forms of lower fees, dividends/interest, and member perks.
These are the main ways that credit unions generate revenue:
Members can take out an auto loan, personal loan, mortgage or business loan from credit unions. The credit union will charge the member interest. For example, if someone borrows $1,000, they may have to pay back $1,100 eventually — resulting in a $100 profit for the credit union.
Credit unions typically charge lower fees than traditional banks, but they do still have some fees. For instance, a credit union might charge an overdraft fee if you overdraw your account, or they may charge origination fees to take out a loan.
Interchange fees are automatic fees that are charged to merchants whenever a customer uses a debit or credit card at that store. For instance, when you buy groceries with your debit card, the grocery store must pay your bank (or credit union) a small fee to process the transaction.
Advisory services and partnerships
Some credit unions may offer advice and guidance from professionals for a fee. For example, they may have an in-house financial advisor or they may refer members to a third-party insurance expert.
Unlike traditional banks, credit unions are exempt from most federal and state taxes because they are member-owned. This helps credit unions save money on taxes, which results in more profits and better perks for credit union members.
Credit unions vs. banks
In terms of how they make money, credit unions and banks are fairly similar.
Banks make money through the interest they charge on loans, the fees they charge customers and more.
Credit unions make money through interest, fees and loans.
The main difference is that credit unions generally make less money than banks because credit unions charge lower interest rates and offer their members more perks.
Credit unions pass on their profits to their members, in the form of lower fees, better interest rates, etc.
Banks pass on their profits to their owners and shareholders. They exist to maximize profit.
Apart from this difference, there’s one more factor to consider: Traditional banks may also have more opportunities to make money.
For instance, large banks may have investing and trading divisions that make money in the stock market. Credit unions typically don’t participate in these activities.
Credit unions are a great choice for your banking needs and can help you save money over traditional banks.
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