Do Credit Unions Have Higher Interest Rates?

Credit unions and traditional banks are financial institutions with different foundational principles. Credit unions are member-owned cooperatives focused on affordable services, returning surplus earnings to members via reduced fees, better rates, and enhanced services. Banks are for-profit entities aiming to maximize shareholder earnings. This article explores how these differences influence interest rates for savings and loan products.

Understanding Interest Rates

Interest rates represent the cost of borrowing money or the return on saved funds. For individuals saving money, the Annual Percentage Yield (APY) indicates the actual rate of return earned on a deposit account over a year, taking into account compounding interest. A higher APY means more earnings for the saver. When borrowing money, the Annual Percentage Rate (APR) reflects the total cost of a loan over one year, including the interest rate and any additional fees. A lower APR signifies a more affordable loan for the borrower.

Interest Rates on Savings and Deposits

Credit unions often present a compelling option for higher returns on deposits. They offer higher interest rates on products such as Certificates of Deposit (CDs) and savings accounts compared to traditional banks. For instance, credit union CD rates can be almost a full percentage point higher than bank CD rates for similar terms. This difference is noticeable when comparing credit union rates to the low rates offered by large, traditional brick-and-mortar banks, where basic savings accounts might yield as little as 0.01% to 0.10% APY.

While traditional banks offer lower rates, some online-only banks can provide competitive high-yield savings account rates, sometimes exceeding 4% APY. However, for those preferring a physical branch presence, credit unions maintain an advantage in deposit rates. The National Credit Union Administration (NCUA) publishes data comparing these rates, confirming credit unions provide more favorable terms for savers.

Interest Rates on Loans

Credit unions offer competitive interest rates across various loan products compared to traditional banks. This is observed in auto loans, where credit union rates can be 2% lower than bank rates. For example, new car loan rates from credit unions were around 2.98%, while banks were closer to 4.77% for similar terms. This can result in significant savings over the life of an auto loan.

Personal loan rates are also lower at credit unions; the national rate for a three-year personal loan at a credit union was around 10.75% in early 2025, compared to commercial banks at 12.03% for the same term. Federal credit unions have a legal cap of 18% on personal loan rates, offering a protective ceiling for borrowers. For mortgages, credit unions provide lower rates, leading to more affordable home financing options.

Factors Affecting Interest Rates

Several factors explain why interest rates differ between credit unions and banks. A primary reason is the non-profit status and member-owned structure of credit unions. Unlike banks, which distribute profits to shareholders, credit unions reinvest surplus income back into the institution, benefiting members through better rates and lower fees. Credit unions also benefit from tax exemptions on corporate income, which enables them to offer more competitive rates.

Credit unions have lower operating costs compared to larger banks, due to fewer branches, leaner administrative structures, and a focus on community-oriented service. These reduced overheads allow them to pass savings directly to members. Broader economic conditions also play a role, as the federal funds rate set by the Federal Reserve influences interest rates across all financial institutions, affecting both savings and loan products. An individual’s creditworthiness, reflected in their credit score, significantly impacts the interest rates they qualify for, with higher scores leading to lower rates on loans regardless of the institution.