Credit Unions Vs. Banks: Differences in How Financial Institutions Approach Lending

Both banks and credit unions provide traditional financial services, such as loans, deposit accounts, or investments. The main difference between credit unions and banks is ownership: credit unions, at the most basic definition, are financial co-operatives: a group of people invest money, agree on how the money will be used, and share the proceeds when it is returned. 

In more traditional definitions of a credit union, members share a common bond (like the same company or the same type of job) and are governed by a Board of Directors. By pooling their money, these members can get cheaper rates. More recently, many credit unions work with the general public. 

‍When you deposit funds at a credit union, your funds are used to lend money to others, in the form of mortgages, auto loans, personal loans, etc. There is a difference between the money that he credit union will pay on deposits (eg. you earn interest on the money as it sits there) and what it charges as interest. Most credit unions are incentivized to keep rates, and other fees, low – but they are bound by the member-driven and owner mandated standards for lending money. This ownership changes the culture of lending. 

Lending at a Bank

Banks are for-profit institutions. They’re privately or publicly owned, and the interest rates, fees, and lending choices are driven by profit generation, risk mitigation, or legal requirements. While both credit unions and banks are regulated heavily in Canada and required to provide deposit protection, the banks are generally accountable to shareholders, not members. Lending decisions and loan approvals (for car loans, mortgages, etc) are optimized and often strictly regulated. 

For brokers – if a customer’s credit score doesn’t meet the threshold, banks have less wiggle room. Say Mr. Bob Borrower is trying to secure a truck loan. He has some cash down and decent credit, except for a bunch of write-offs incurred 3 years ago while going through a divorce. At the bank, he might not qualify. The rate won’t necessarily be bad – there just might not be a loan, unless the borrower is willing to put more cash into the transaction. 

At a traditional lender, documents must be collected and investigated thoroughly to support the borrower’s financial position. While loans can be quick and rates favourable, they work best for borrowers who are in a good lending position. 

Lending at a Credit Union

Credit unions are still heavily regulated – they must offer deposit protection and follow other rules around Canadian banking (anti-money laundering, for example) and depending on the type, may need to apply for a mortgage license when lending. However, they do not require any special license to make a loan. Credit unions are still subject to the rules set out by their members and the Board, but can often offer more flexibility when lending. 

Using the example above, Mr. Bob Borrower is still trying to secure his truck loan. He wants to limit his cash down, because he has decent credit, despite the write-offs. The broker might be able to find him a deal with a credit union, who can offer ‘more wiggle room’ – they could explain the situation (“my ex-wife put credit cards in my name!”),  prove the divorce has been finalized, and point to the fact that Bob has been a credit-worthy borrower before and since. Of course, this will require extra documentation.   

The credit union’s rate might be a little higher than the bank’s would have been, but in this example, the bank wasn’t ready to do the deal at all. With the credit union, the customer can get the truck and use his cash for other things. The credit union gets a little extra interest from taking on the risk of the deal. And everyone is happy – especially the broker, who made it happen. 

The difference in ownership between banks and credit unions will deeply impact their approach to lending. Banks offer speed, scale, and available capital, but credit unions will sometimes reward the broker for doing extra legwork in the form of flexibility, cost savings, and relationship building. Both are a necessary resource in your network when lending.