If you are looking for a loan to buy a new vehicle, you have several options available to you. You can get a car loan from many different lenders, but the most popular are banks and credit unions.

Auto loans from credit unions work in much the same way as a car loan from a bank. You borrow money from the credit union, then pay it back with interest over a defined length of time. The main difference is that a loan from a credit union often has a lower interest rate than a loan from a bank—however, you’ll have to join the credit union to apply for one.

Learn more about the main differences between auto loans from credit unions and those from banks, so you can decide which is right for you.

Getting a Car Loan Through a Credit Union or a Bank

Credit unions and banks both offer car loans that work in similar ways, but there can be significant differences between them.

Many of these differences stem from the more fundamental difference between a credit union and a bank. A credit union is a type of financial cooperative that provides traditional banking services like loans and mortgages. Some credit unions are small, but others have thousands of members and operate nationwide. Unlike banks, credit unions are owned and operated by their members, and they don’t operate for profit. This means that they can often offer lower interest rates than banks.

In many other respects, a car loan from a bank and a car loan from a credit union are quite similar.

Car Loan Requirements

To get a car loan from a credit union or a bank, you’ll need to provide documents such as:

• Proof of identity: You will typically have to provide a photo ID with your signature on it.
• Proof of income: You can generally submit a pay stub as proof of income. Some lenders will also ask you about your monthly expenses.
• Credit history: A lender will check your credit to make sure you can repay the loan. For this, you’ll need to provide them with your Social Security number (SSN), address, and date of birth. Lenders will check your financial history, such as your debt and repayment history.
• Proof of residence: A driver’s license is normally sufficient to prove your residence. Some lenders will also ask you how long you’ve lived at your current address, and whether you own your home.
• Trade-in information: You will need information about your current vehicle if you’re going to trade it in.

A key difference between car loans from credit unions and car loans from banks is that you need to be a member of a credit union to take a loan out.

Car Loan Features

Whether you get a car loan from a bank or a credit union, your loan will have similar basic features:

• Interest rate: Interest rates can vary. Some lenders charge 2.5% for short-term loans to borrowers with a good credit history, but interest rates can be as high as 25% for some loans.
• Loan term: A loan’s term is how long you have to repay the loan. This can also vary, from one year up to eight years.

Before you sign any auto loan, read the contract carefully. You should also look for additional costs like the following, which could increase your borrowing costs:

• Hidden fees
• Vehicle add-ons
• Early payoff penalties
• Longer loan terms that could increase the overall cost

Credit Union Car Loans vs. Bank Car Loans

Getting a car loan through a credit union rather than from a bank can have several advantages. These include:

• Lower interest rates: Interest rates on new-car loans from credit unions average more than 2% lower than bank rates.
• Fewer requirements: Once you are a member of a credit union, it can be easier to get a car loan than from a traditional bank, especially if you have a poor credit score.
• More flexible terms: Credit unions can be more flexible than banks when it comes to repayment terms, and tend to charge lower fees.
• More personal service: Many customers value the personalized customer service that many credit unions offer. Because credit unions are generally smaller organizations than banks, they can often spend more time understanding your specific financial situation.

These advantages mean that car loans from credit unions are generally a better financial choice than a car loan from a bank (or a dealership). However, car loans from credit unions do have drawbacks to keep in mind—primarily, you must qualify to be a member and join the credit union. The major disadvantage of an auto loan from a credit union is convenience. To apply for an auto loan from a credit union, you’ll have to be a member first. With some credit unions, you might even have to be a member for a number of months (or even years) before you can access the best rates on car loans. If you want to buy a new vehicle soon, you might not have time to go through this process, and a bank loan may be your best option. However, it may be worth joining a credit union so you can access a loan with lower rates for your next vehicle.

The Bottom Line

Car loans from credit unions can be less convenient than car loans from banks, because you will have to become a member of the credit union first and may have to wait before you can apply for a loan. However, credit union auto loans are generally more affordable than auto loans from banks. They tend to offer lower interest rates, longer and more flexible repayment terms, lower fees, and more personalized customer service.