Can I Get a Loan From a Credit Union With Bad Credit?

Credit unions are a good option for securing a loan, especially for those with fair to poor credit. Not only may it be possible to get a loan from a credit union with bad credit, but they also offer unique benefits compared to commercial banks.

Learn how credit union personal loans work, the advantages of credit union loans and how you can secure one, even if you have less than perfect credit.

What Is a Credit Union?

On the surface, credit unions look like conventional banks that offer savings and checking accounts, debit and credit cards, consumer loans, auto loans, mortgages, ATM’s and so on.

But credit unions are different in a few important ways. For starters, credit unions are owned by their members, unlike conventional banks which are usually owned by shareholders. Without shareholders to appease, credit unions can often focus more on serving their members with favorable products.

While many credit unions accept anyone as members, others often have special membership requirements. For instance, some credit unions are only open to specific affinity groups, such as U.S. military veterans, company employees, union members, workers in certain occupations and members of specific churches or organizations.

For example, Navy Federal Credit Union only accepts active and retired military veterans, their family members and employees of the Department of Defense (DoD) and DoD affiliated groups. Teachers Federal Credit Union serves educators and First Technology Credit Union caters to employees of specific technology companies.    

Credit unions are also different than traditional banks because they are non-profit organizations. That means they reinvest profits into the institution or distribute profits to members as dividends.

Benefits of Credit Union Loan for Borrowers With Bad Credit

Here are the advantages credit unions may offer for borrowers with fair to poor credit:

Credit unions may accept riskier borrowers than large commercial banks:

As not-for-profit organizations, credit unions are tax-exempt and, consequently, they are less profit-focused than commercial banks. These organizations aim to serve their members, not shareholders, and often extend credit opportunities to those who cannot find them elsewhere. You may also find lower interest rates and fees than with most banks.

Credit union loans can never impose interest rates higher than 18%.

The current cap of 18% has been set by the National Credit Union Administration (NCAU). The 18% limit applies to everyone, no matter what their credit score. By contrast, a similar loan from a commercial bank could cost you up to 36% interest.

For example, if you borrow $12,000 on a 3-year loan with a credit union, the total cost with interest is $15,617.83. That same loan with a conventional bank at 36% interest would cost $19,787.24. In this case, a credit union loan could save you $4,169.

Most credit unions actively seeking borrowers.

Consumers who can afford the terms of a loan according to their credit score can usually find a willing lender.

Affinity based credit union memberships may offer unique loan products and terms to serve the interests of their members.

For example, employees and their family members from leading technology companies can become members at First Technology Federal Credit Union. This credit union rewards borrowers by loaning higher amounts with longer terms than many other lenders.

How to Apply for a Credit Union Loan With Fair or Bad Credit

A credit union loan is a good option for those with marginal credit to cover an emergency expense or to consolidate debt. Learn these helpful tips before applying for any loan from a credit union.

Check Your Credit

Before applying for a loan, review your credit scores and reports and look for any discrepancies or suspicious activity. If your report contains inaccuracies that you think might be hurting your credit, file disputes with the credit reporting agencies quickly to correct your credit report.

Contact Your Credit Union

Once you know your credit score and history, call your preferred credit union and ask the loan department how to get a loan. Also, ask the loan officer if your score would qualify for a personal loan.

Inquire if they will make a soft or hard inquiry on your credit report. A soft inquiry should not affect your credit score. However, a hard pull may affect your credit report and remain on your credit report for about 24 months.

If your credit score doesn’t meet their loan requirements, don’t allow the credit union to make a hard inquiry on your credit. In this case, it may be best to find another credit union to work with.

Provide Proof You Can Repay the Loan

Lenders are risk-averse, which means they only want to work with people they believe will repay them. As such, any loan amount they offer will depend on your capability of paying them back.

Ease their fears by giving them proof of your income, commonly in the form of your paycheck stubs, or your tax W2s.

You might also consider adding a cosigner to your application. A cosigner is usually a close friend or relative who provides a guarantee that the loan will be repaid. If the principal borrower fails to pay as agreed, the cosigner is then obligated to pay the remaining balance on the account.

Shop Different Credit Union Lenders

Only apply at credit unions where you feel confident you can meet the loan requirements. However, don’t go with disreputable lenders just because you meet their qualifications. Keep looking as it’s much better to find a trustworthy credit union that is willing to work with you.

Cost of a Credit Union Personal Loan

While the interest rates that credit unions can charge is capped at 18%, the average interest rates offered by federal credit unions over the past five years is actually 9.3% on three-year loans.

Note that state credit unions charge higher interest rates than federal credit unions on average. During the same period, state-chartered credit unions charged 11.3% APR for personal loans.

These interest rate offer you receive may be higher or lower than these averages depending on your credit history and credit score.

What if My Loan Application Is Denied?

Despite more forgiving lending requirements, credit unions still reject loan applications. If you find yourself in this situation, your first step should be to find out why your loan was denied. You might also inquire with the lender to find out what steps you can do to prevent denials in the future.

Remember that lenders are required to provide you with specific disclosures. Also, they are usually willing to explain what led them to reject the loan, so it’s worth it to ask questions.

Take the time to examine your credit profile the same way lenders do. Look for red flags in your credit and review your debt-to-income ratio to make sure you can repay the loan.

Before you apply for another loan with a credit union, aim to speak directly with one of their loan officers who can explain what you’ll need for loan acceptance. They can inform you what they look for and what they don’t. They can advise you what credit score you’ll need and what your debt-to-income ratio should be to meet their requirements.

What Loans are Available for Borrowers With Bad Credit?

A bad credit loan is a personal loan commonly used to offer consumers relief in the face of a financial emergency, even if their credit score is low. Generally speaking, these loans can help those with credit scores under 650, which is lower than many banks would prefer.

If your credit score is lower than you would like, and you need emergency money or would like to consolidate your debts, don’t despair; a bad credit loan from a credit union may be within reach.

Another loan option you might consider is a home equity loan or a home equity line of credit (HELOC). As long as you have equity in your home, you generally can get a loan. And since the loan is secured by the property, the interest rates may be lower than other loan products.

Of course, the obvious downside to home equity loans is that it puts your home in jeopardy if you don’t repay the loan. But many borrowers who are disciplined and have a steady income find these loans an inexpensive way to borrow money.

Peer-to-peer (P2P) lending is a relatively new option, having only been around since 2005. This online platform offers borrowers the opportunity to get a bad credit loan from another person or from a group of people.

To get a peer-to-peer loan, borrowers post a listing on different P2P websites. You’ll need to fill out the amount you want to borrow and why you want the loan. Investors will review your listing and choose whether or not to work with you.

Since you’re dealing with individual investors, their requirements are typically not as rigid as commercial banks. Lending standards tend to be more lenient and they are usually more willing to work with borrowers with marginal credit.

The Bottom Line

If your credit scores aren’t what you would like them to be and you need a loan right now, your best option may be to find a reputable credit union that offers personal loans to people with bad credit.

Carefully compare the interest rates and terms of different personal loans to choose the most affordable credit union willing to work with you. And if you don’t find an affordable loan option, don’t force it. Instead, it may be best to regroup and try again when your credit score is higher.

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