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How do credit unions make money?
Credit unions are not-for-profit, member-owned banking cooperatives. Unlike traditional banks, they aim to serve their members rather than maximize shareholder profits.
Even so, credit unions need to make money to continue operating. Given their different business model compared to banks, you might wonder how credit unions make money.
How credit unions make money
For the most part, credit unions make money the same way traditional banks do. However, credit unions often share their profits with members through lower fees and competitive rates. Here’s a closer look at the main ways credit unions make money and how members benefit.
Interest on loans
When you deposit money at a credit union, it pools those funds with other customer deposits to lend money in the form of mortgages, auto loans, personal loans, and more. The interest rates it charges on those loans are higher than the rates it pays on deposits. And that difference — known as the net interest margin — is one of the credit union’s primary sources of income.
Investments
In addition to providing loans, credit unions also use funds on deposit to invest in relatively low-risk, interest-earning securities, like government bonds or similar instruments. These investments provide a stable source of income without taking on too much risk, keeping in line with the conservative and member-focused mission of credit unions.
Fees
Credit unions charge various fees, such as loan origination fees, monthly account fees, overdraft fees, and membership fees.
As member-owned not-for-profit institutions, credit unions often prioritize keeping fees low. However, they must still charge some fees to fund their operations. These fees help cover the administrative costs involved with managing members’ accounts and loans, and contribute to total revenue.
Read more: Credit union vs. bank: Which is right for you?
What do credit unions do with the money they make?
Although credit unions are not-for-profit organizations, they still bring in revenue, often more than their operating expenses. However, credit unions typically share their excess revenue with members rather than pocketing the difference.
Competitive rates and low fees
Credit unions don’t give cash directly to their members the way publicly traded companies issue dividends to their shareholders. Instead, they return their excess revenue to members through competitive interest rates and lower fees.
Credit unions might offer lower rates on various loan types, such as mortgages, auto loans, personal loans, and credit cards. This is beneficial to members because it makes borrowing more affordable and accessible. With lower rates, members can save hundreds or even thousands in interest payments over the life of the loan, depending on the loan type and amount.
Credit unions also offer various deposit accounts, such as high-yield savings accounts, certificates of deposit (CDs), and money market accounts, which often pay much higher interest rates and come with lower fees than those offered by traditional banks. With higher rates and lower fees, members can grow their savings faster, making it worth keeping their money at a credit union.
Enhanced member services
Another way credit unions reinvest in their membership is by improving the services offered, such as increasing ATM or branch locations, or improving digital banking technology. They may also create financial literacy programs, community events, or workshops to help members make informed financial decisions.
Community development
Many credit unions also invest in community-focused initiatives, such as funding local charities, offering small business loans to underserved populations, or providing grants and scholarships.
Read more: 7 credit unions anyone can join
The bottom line
Credit unions’ approach to making money and reinvesting revenue is uniquely focused on serving members and strengthening communities. Through interest on loans, fees, investments, and other revenue-generating activities, credit unions generate income. The big difference is that they use those funds to lower costs for members, improve services, build financial stability, and generally give back to members and the community.
Read more: Are credit unions safer than banks?
