Managing multiple debts can be really overwhelming especially when you are already in a financially tough situation. During such overwhelming times, debt consolidation can bring you the much-needed relief and financial reset that you’ve been longing for. For people who are new to consolidation loans, it’s a tough call whether they should apply with a credit union or traditional banks.
Each option comes with different advantages but the right one solely depends on your financial profile, your preferences and your financial goals. Today we are going to discuss both credit unions and traditional banks in detail so that you can make a more informed decision. From local vs natural approach to member benefits and lending criteria, let’s dive deep into all aspects for a better understanding.
Understand Debt Consolidation And When It’s The Right Option
Combining all of your high interest debts especially credit cards and personal loans into one is called debt consolidation. Consolidation means you’ll only have one single monthly payment and interest to take care of. In simpler words, it’s a strategy used to simplify your debts and it also reduces the amount of interest you pay over time. For consolidation loans, two of the most common lenders are; credit unions and traditional banks but both operate in completely different ways.
Credit Unions – Local And Personalized Approach
Credit unions come with multiple advantages including;
1-Lower Interest Rates
Credit unions are basically non-profit institutions and the biggest advantage of applying for a loan from them is that they offer lower interest rates as compared to banks. Not only this but they offer higher saving yields and lesser fees as well. In a nutshell, you can expect to save a substantial amount over the life of your loan due to the difference in interest rates.
2-Member Benefits
In order to apply for a loan from a credit union, you first need to become a member. For membership, you either need to deposit a small fee or meet their qualifying criteria like;
- You should be employed with a specific organization
- You should be a resident of a specific area
- You need to be a part of a school or a place or worship
Once you meet the criteria, you become a member and you are considered a part-owner as well. This comes with a lot of perks including voting rights, multiple useful educational tools and credit counseling as well.
3-Flexible Lending Criteria
The biggest benefit of opting for a credit union is that they use a more personalized approach. This means that even if you don’t have a perfect credit score, they’ll still approve your loan especially if you have a good relationship with the institute.
They are more flexible when it comes to their lending criteria and they’ll look beyond your credit score;
- Your current debt load
- Your history of employment
- A guarantor or a co-signer.
When Should You Choose A Credit Union?
You should choose a credit union when;
- You have a fair or average credit score
- You want more community engagement
- You want to join a membership based institution
- You want to save on interest in the long run
Traditional Banks – Trust And Stability
Opting for a traditional bank for your debt consolidation loan isn’t a bad choice either. Here are some benefits;
1-More Products And Wider Range Of Loans
It’s an undeniable fact that due to more resources, banks offer scale. Especially if you are already a customer of a reputable national bank, you can easily apply for a consolidation loan online through your bank application. Most importantly, banks offer more products including personal loans, balance transfer credit cards and even home equity loans. In a nutshell, with a good credit score and a maintained credit history, securing a consolidation loan through a bank can be more convenient for you.
2-Standard Lending Criteria
Banks rely more on standard automated unwriting systems like your credit scores, your DTI and your income. In fact, if you have an excellent credit score and a lower DTI then your bank won’t just offer faster approvals but it’ll also give competitive rates.
3-More convenience
If your main priority is convenience then opting for traditional banks for your consolidation loan is the right choice. Larger banks have high tech digital platforms where you can easily manage your accounts through your mobile. You don’t need to pay visits to the bank again and again and you’ll have access to customer service 24/7.
When Should You Choose A Traditional Bank?
You should choose a traditional bank for your loan when;
- You have an excellent credit score and you qualify for the best rates
- You require a digital-first experience and you need faster approvals
- When you already have a good relationship with your bank
Comparison Between Credit Unions And Banks
Here’s a comparison between credit unions and banks to help you make a better decision for your financial wellbeing.
| Features | Credit Unions | Traditional Banks |
| Interest rates | Lower interest rates | Higher interest rates |
| Lending criteria | Flexible (can work with average credit scores) | Strict (requires a fair or good credit score with a low DTI and a solid income) |
| Customer service | Local and personalized | Centralized but available 24/7 |
| Product range | Community focused | Wider, National options |
| Approval time | A little slower | Fast approvals |
Overall Verdict
Debt consolidation is one of the smartest moves you’ll ever make especially when you are juggling between multiple debts and repayments every month. Combining all of it into a single loan can work wonders for you especially if you really are motivated to get yourself out of debt. However, where you apply matters the most in this process. Credit unions are more ideal among borrowers because they offer more flexible terms, better interest rates and they use a more community-focused approach. On the other hand, banks are known for being more stable and convenient.
Traditional banks are more suitable for those with top-tier credit scores. Before you apply, it’s quite important to first explore both the options, study their criteria and loan terms. You should compare the two options and then choose the one that fits you the best. A great tip is to use a loan calculator in order to know and understand your monthly obligations as per the amount of your debt. Whatever route you take, debt consolidation will only work for you if you practice financial discipline. After securing the loan, your first priority should be to make timely payments and keep your credit utilization ratio low.
FAQs
Q1. Is It Easier To Get A Debt Consolidation Loan From A Credit Union?
Yes, it’s comparatively easier to secure a consolidation loan from a credit union as compared to traditional banks. Credit unions are more flexible when it comes to their lending criteria and they always look at your full financial picture instead of just relying on your DTIs and credit scores. Especially if you are already a member of the union with a strong history, your chances of securing a loan with better rates are higher.
Q2. Will Debt Consolidation Hurt My Credit Score?
Yes, initially your credit score will take a little dip after debt consolidation and that’s due to the hard inquiry during the application process. However, the dip is temporary and it’ll improve over time especially if you manage your monthly dues responsibly and keep your credit utilization as low as possible.
Q3. Is It Possible To Pay Off A Debt Consolidation Loan Early?
Yes you can pay off your debt consolidation loan earlier than the decided term. Most credit unions and banks allow early prepayments without any penalties but it’s not always the same. It’s important to first check with your lender and read their prepayment clauses carefully.
Whether you pick a credit union or any other avenue, our goal at Mountains Debt Relief is to provide you a clear path for easier and seamless debt consolidation. Contact Now and try our consultation services to regain your financial freedom without any hassle.