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Should you do business with a credit union, bank or savings institution? Over the years, the distinctions have blurred. But there still are some very important differences. Sometimes your financial well-being can depend on knowing what they are.
You may get better deals at a credit union. Unlike banks and thrifts, which may be savings and loans or savings banks, credit unions are not-for-profit. There are exceptions to every rule. Generally, they have had better car loan rates than banks and thrifts. Historically they offer higher deposit rates and lower fees.
Beware. Unlike with banks and thrifts, not all credit unions are federally insured. Closely examine insurance protection on credit union savings accounts and CDs. Also, smaller credit unions may not offer as many services as you can get at a large bank or thrift. Some may not be open when you need service.
You'll need to be a member to join a credit union, open a "share" or savings account and, probably, pay a membership fee.
Banks and thrifts, on the other hand, are for-profit. All are believed FDIC-insured. Want a business loan? You may stand your best chance of getting one at a bank.
Federally chartered thrifts are limited to an aggregate combination of just 20% of assets in business loans. Efforts, though, are underway to change that.
Federally chartered thrifts may have more freedom to branch nationwide than nationally chartered banks, says Kevin Petrasic, managing director of external affairs for the Office of Thrift Supervision. Reason: They have no limits. Banks can only branch by acquisition. If it costs thrifts less to branch nationwide, this could mean lower-cost nationally available services for you.
Banks typically have the widest array of savings, investments and loans of federally insured institutions. Commercial banks offer checking accounts and certificates of deposits. They make loans, offer fiduciary services, issue letters of credit and accept and pay drafts. Most also offer installment loans, commercial loans, credit cards and mortgages.
Large banks often have a sizable number of local branches and ATMs. Expect to find more free ATMs when you travel if you do business with a large commercial bank.
All three types of institutions offer deals now and then on prime-rate-linked consumer loans, like home-equity loans, says Patricia McCoy, University of Connecticut law professor. So it's best to shop for those.
Mortgage moves
However, if you're searching for a mortgage, the type of lender you choose may be critical.
Thrifts could be a great place to go, suggests Robert Schmermund, executive vice president for America's Community Bankers, in these circumstances:
--You have a blip on your credit score
--You seek a jumbo mortgage, which is a mortgage greater than the current $417,000 conforming loan limits
--You're an immigrant, first-time homebuyer, have your own business or have very little to put down on the loan
More big advantages of thrifts: Institutions that specialize in home loans may offer a wider variety of mortgages. They are more likely to keep the loan on their books and not sell it to investors. They may have greater freedom to tailor a loan to your needs.
Schmermund's trade group, once the U.S. League of Savings Institutions, now represents some 1,100 "community banks." At least 900 technically are thrifts. Small community banks, Schmermund adds, also may cut you a better break if they know you.
But there's no free lunch when it comes to doing business with thrift institutions. They're more apt to require adjustable-rate mortgages for borrowers in those unique situations. That means you can get into financial difficulty if interest rates rise too high and loan payments soar.
Unfortunately, neither banks nor thrifts likely will offer "subprime" loans, or loans to people with poor credit scores. Instead, expect them to refer you to a lending subsidiary.
"My strong caution is consumer beware," McCoy says. "Because there is less regulation, subsidiaries don't worry quite as much about their reputations."
Tip if you are shopping for a mortgage: Check out state-chartered financial institutions. You have more consumer protection due to state laws. The lender may be less likely to entice a borrower with limited resources into an initially low-rate loan with below average mortgage payments that could later backfire.
"About half the states have good antipredatory lending laws," McCoy said. Among the strongest: North Carolina, New York, Illinois, Massachusetts and New Mexico. Particularly if you live in those states, seek out a state-chartered institution for your mortgage.
This way, if you have any problems with your loan, you'll have an easier time getting effective recourse.
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