It is important to distinguish a credit union and its services from banking institutions, because both provide identical services. Both in banks and credit unions, customers can take out secured loans, open deposit accounts, and set up settlement accounts. Moreover, the conditions for calculating interest on a loan or deposit, extending financial obligations, and paying dividends are similar. What is the difference between these organizations?
What is a credit union?
First, let’s look at what a credit union is. A credit union is a financial organization whose primary goal is not to make a profit, but rather to be founded by individuals and legal unions that exchange services among the members of the union. To grant a loan to any member who has applied for help, other members of the union take money from the general savings fund.
If a participant takes out a loan for their own personal needs: travel, buying a house or car, medical treatment, and so on, participants who provide the loan will be able to receive interest on it.
This is the difference between credit unions and banks. Banks earn money for their shareholders, and credit unions provide financial assistance for a smaller percentage that they take for themselves.
Founders of credit unions place money on their bank details and on time, and if any of the participants need it, the money will go to their account at the agreed time, and they will return it with interest.
The principle by which credit companies operate is similar to that of an insurance company — all participants must contribute a certain amount to the general fund on a monthly basis. All mandatory payments are specified in the charter.
It is much more profitable to get a loan from a credit union than from a bank, because participants do not have the goal of enriching themselves at the expense of others. In fact, the main mission of the credit union is to increase the level of financial well-being of each participant and promptly solve any financial problems that arise.
Main differences from banks
Very often, people unknowingly compare banks and credit unions. Yes, of course, they have common fundamental features, since they are directly related to the lending process. But now we will give arguments that will clearly identify the distinctive features of each organization.
Banking institutions are very demanding of their customers. They prescribe clear terms and interest rates for repayment, and in case of non-compliance with the requirements of the borrower, his loan will be extended by a larger percentage. To obtain a loan, except for a secured loan, the bank checks all the necessary information about the client and their credit history. If at least one loan default or overdue repayment is shown in the history, the bank will refuse the borrower even a small amount of money. It is not uncommon for a bank to refuse to lend to customers of other banks, because they do not have a current account and do not have a deposit account. The loan will be refused if the client has an open loan from another bank. The bank provides all these requirements to the client if he wants to get a loan for an average check, but if we are talking about a good amount of money, the bank will require collateral for real estate, a car or assets.
Credit unions in Ukraine often cannot provide more than this amount, as their authorized capital is formed only from the investments of participants. Especially if the union is only recently formed, it does not have large amounts of money. However, when issuing money, the union will not view previous repayment histories and collect all information related to the borrower’s financial condition.
In case of delay on the loan, the bank has every right to withdraw the property that is billed as a loan, sell it through the court and get its money, as well as cover all costs. This is done in order to protect the interests of its shareholders. Credit unions do not issue loans against a loan. Firstly, there is no such money in the authorized fund, and secondly, all participants are in a trusting relationship with each other and act for the common good.
The more members a credit union has, the greater the financial opportunity such an organization can provide.
For what purposes can I get a loan from a credit union?
We have already found out what a credit union is. Now we need to tell you about the purposes for which money is taken from the authorized fund of the credit union and why participants do not apply to banks for loans.
Participants ‘ goals can be very different: from buying a car to investing in a business. Therefore, we can distinguish two groups of needs:
- Credit for personal purposes. Traveling, buying a new car or house, buying jewelry, and so on. Do not count the number of needs that may arise for members of a credit union.
- Credit for the attachment. To invest money in a financial transaction and turn it around in order to make a profit.
- Professional activity loan. The purpose of the loan may be the purchase of new equipment or material assets, an advertising campaign, rebranding, and other opportunities to improve the financial condition of your business.
Advantages and disadvantages of a credit company
A credit union in Ukraine is distinguished by its simplicity and transparency. The terms of the loan agreement are reduced to a minimum of necessary points and are clear to everyone. The main sections for both the lender and the borrower will be: loan amount, loan body maturity dates, and loan interest.
All members of the credit union are identified, so you don’t need to collect additional information about each of them. The borrower can contact the credit union at any time and be provided with the amount.
There are fewer requirements for the borrower than in banking institutions. Since the union employs only “their own” people, they have an increased level of trust in each other. As we said above, the principle of the company’s work is very simple — the participants, knowing each other, invest money in the “obshchak” and then use it if such a need arises. All credits are granted only on the basis of trust between participants. In addition to financial responsibilities, the borrower also has a social obligation, since he takes money from his friends or relatives.
Therefore, the next advantage is the loyalty of a financial institution. You can make a schedule for repayment of interest and the loan body “for yourself”. The schedule is not only flexible, it completely eliminates fines and penalties for late repayment. Everything is based only on the conscience of the borrower and his real financial capabilities.
The only drawbacks of a credit union are that only members can take out loans, and no third parties are allowed to apply to a private organization. Also, the loan amounts are small and are provided for a short period of time. That is why for a large purchase, they still apply to banks for a loan.
What do you need to know when choosing a credit union?
As we have already noted, credit unions are non-profit societies designed to help their members with financial issues. Before depositing your own money to a credit union, it is advisable to request the following documents from participants that would confirm their official status and reliability:
- The Charter of a credit union is the most important document that specifies all the issues related to the placement of deposit investments and the issuance of credit funds. It is best to visit the organization in person and make sure that the document with all the seals is available.
- State licenses and certificates for allowing the implementation of credit details. All services must be supported by state acts.
- Internal regulations on the work of a financial institution.
- Reports (monthly, quarterly, and annual) that are submitted to the Ministry of Finance of Ukraine.
Do not limit yourself to a phone call with one of the participants and do not trust your money to someone you are not sure about. Check all the documents of the union fund, and then only make a decision on the placement of deposits.