Understanding Credit Union Loans: A Comprehensive Guide
Getting a loan with bad credit can be challenging, but credit unions might offer a viable solution. At O1ne Mortgage, we understand the intricacies of securing loans and are here to help you navigate the process. Call us at 213-732-3074 for any mortgage service needs. In this blog, we will explore how credit unions operate, the types of loans they offer, and how you can improve your credit score to increase your chances of loan approval.
Do Credit Unions Check Your Credit?
Credit unions and banks have several differences, but both institutions typically check credit reports and scores as part of their loan application process. Lenders, including credit unions, usually set minimum credit score requirements for various loan types, along with standards for income and debt-to-income ratio (DTI).
Will a Credit Union Give Me a Loan With Bad Credit?
Credit unions are unique in their organizational structures, legal standing, and mission statements, which may allow them to consider applicants with less-than-ideal credit. Unlike traditional banks, credit unions are member-owned and focused on serving their members’ needs. Membership can be open to all in a specific geographic area or limited to certain groups, such as military servicemembers, veterans, trade union members, or employees of specific companies.
Federal law permits credit unions to offer special purpose credit programs for their members. If you qualify and join—typically by opening an account with a nominal deposit—your credit union may offer special programs even if you have tarnished credit. As not-for-profit institutions, credit unions funnel any financial gains back into programs for their members or, in some cases, dividend payments to members. This nonprofit nature may make credit unions more willing to accept riskier borrowers or offer better borrowing terms than banks and finance companies.
Each credit union sets its own lending criteria and determines the interest rates and fees it charges, within legal limits. If a particular credit union offers loans to individuals with fair to poor credit, they will usually include higher rates and fees, and possibly steeper down payment or collateral requirements, than those required of applicants with higher credit scores.
Types of Loans for Bad Credit
Credit unions offer various loan types, including:
Secured Credit Union Loan
When you take out a secured loan, you must use personal property or funds as collateral. If you fail to repay the loan, the credit union can seize the collateral to recoup what you owe. Mortgages and auto loans are considered secured loans because the lender can seize the financed asset if the loan is unpaid. Collateral on a personal loan can include property or cash in the form of a certificate of deposit.
Home Equity Loan
A home equity loan is a special type of secured loan available to homeowners who have built equity in their homes. These loans enable qualified applicants to borrow between 75% to 85% of the portion of the market value of their home they own outright. These loans use the house as collateral, and failure to repay them can lead to foreclosure or a forced sale of the house.
Unsecured Credit Union Loan
When a credit union issues an unsecured loan, also known as a personal loan, it provides you with cash you can use for virtually any purpose, with the understanding that you’ll repay the sum, with interest, in a series of monthly installments. Eligibility, loan amount, and the interest rate will depend on your income, credit score, and other debts. Lack of collateral makes these loans riskier for the credit union, so they may come with higher interest charges and fees than secured loans.
Payday Alternative Loans (PALs)
Credit unions offer payday alternative loans for sums of $2,000 or less, with repayment terms no longer than 12 months. These loans, which carry a maximum interest rate of 28%, are designed to be less costly alternatives to payday loans, which can carry interest charges equivalent to annual percentage rates (APRs) of up to 400%.
Credit-Builder Loan
Designed to help individuals establish credit from scratch or rebuild damaged credit, a credit-builder loan is both a savings strategy and a means for improving your credit history. The credit union issues you a small loan (typically up to $1,000) and, instead of giving you the cash, it places it in a special savings account that you can’t touch until you’ve paid off the loan. If you fail to repay the loan, the credit union keeps the money. If you make all monthly payments (typically over a term of one year or less), the money—plus interest—is yours, and you’ll have added a series of positive payments to your credit reports.
How to Apply for a Loan at a Credit Union
While credit union lending policies may differ from those of commercial banks, their loan application processes are typically much the same, except for the requirement that you become a member of the credit union to apply for a loan.
Check Your Credit Scores
Do this before you apply for the loan to know where you stand and whether you’re likely to meet minimum loan eligibility requirements.
See If You’re Eligible
If you’re considering multiple credit unions, check their websites or speak with a member services representative to find out their loan eligibility requirements and to make sure you qualify for membership.
Join Your Chosen Credit Union
Join by opening a deposit account. Depending on the credit union’s policies and the type of loan you seek, you may have to wait at least 90 days before submitting a loan application.
File a Loan Application
You’ll need to provide required documentation such as proof of ID and your Social Security number, which the credit union requires to run a credit check. Proof of income in the form of tax returns or pay stubs may also be needed, but that requirement may be waived if you have an established account with direct paycheck deposit.
Await the Lending Decision
Depending on the loan type and amount, you could have a decision within days or a few weeks. If your application is denied, ask your credit union loan officer for advice on improving your chances for next time, and work toward further building your credit before applying again.
How to Build Your Credit
There are no quick fixes for credit that’s damaged by misfortune or mistakes, but there are many proven methods for steady, gradual credit improvement.
Secured Credit Card
Consider opening a secured credit card and pay every bill promptly to shore up your payment history. Because these require you to “secure” the credit card with a deposit, it’s often easier to qualify for one than a typical credit card.
Authorized User
Become an authorized user of a credit card that belongs to someone with a great credit record. Their credit history will help boost yours.
Sound Credit Habits
Adopt and stick to credit habits that align with the factors that influence credit scores, such as paying your bills on time, avoiding high revolving credit balances, and taking out new credit only as needed.
The Bottom Line
If your credit has been tarnished, a credit union, with its focus on member service and greater flexibility in setting lending criteria, may be more apt to give you a loan than a commercial bank or finance company. Keep in mind, however, that you’ll still need to meet eligibility criteria for income, debt-to-income ratio, and credit score. To know where you stand before you begin seeking a loan, you can check your credit score for free from Experian and, if necessary, take steps to improve your credit before you apply.
For any mortgage service needs, O1ne Mortgage is here to assist you. Call us at 213-732-3074, and let us help you find the best loan options available.
