Save Thousands Each Year with One Simple Step

Here's a piece courtesy of the e-book Banking Secrets Revealed:

Each year it seems that banks make record profits.  The profits earned by major banks don’t get returned to the customer but get returned to the bank’s shareholders instead.  The management of banks wants to provide a positive return to their shareholders.  To get this return, they charge their customers in a variety of ways for the services they provide.  Interest on loans and fees on a variety of services are two of the primary ways banks earn money.

Banks use sophisticated financial models and employ very bright people to decide the proper rates to charge on their loans.  Their objective is to charge a rate high enough to maximize their interest margin (the difference between the rate they charge consumers and their cost of funds) but low enough to ensure they don’t lose business to major competitors.  On the fee side, banks charge what they think the market will bear.  Fees ranging from late payment fees, overlimit fees, minimum balance fees, ATM fees to a variety of transaction fees add a significant amount to a bank’s bottom line.

Most consumers are not aware of the total amount they pay their bank each year in interest and fees but the number is significant.  Annual interest on a $30,000 car loan can be as much as $2,400 or more depending on the rate charged.  Fees can add up to hundreds of additional dollars each year depending on the services you use.  It’s safe to say that households in the United States pay thousands of dollars in interest and fees each year.

There is a better way. 

There’s a simple way to reduce the amount you spend each year on interest rates and fees and save thousands of dollars in the process.  Switch your banking business from a traditional bank to a credit union.  Credit unions are member-owned, not-for-profit, institutions whose sole purpose is to serve their member-owners. 

Historically, credit unions served the employees of one particular company or the members of a specific occupation. Things have changed, however.  Today, most people have access to a credit union by virtue of where they live or work.  It’s common to find many communities across the country whose residents can join the local credit union.  All is takes is a simple membership application and the purchase of one “share” in the credit union (typically between $5 and $25).

For your membership, you gain access to lower rates on loans, higher rates on savings and lower fees.  Credit unions can charge less because they’re owned by their members and not by outside shareholders.  The savings can be significant.  On the car loan example above, credit unions charge, on average, 1.71% less than banks on used car loans (as of July 19, 2007) according to Datatrac, an industry rate tracking service.  That would mean savings of over $500 annually on the car loan.  If you have two car loans, the savings are doubled.  Similar savings exist on credit cards and home equity loans.  Keep in mind that these are average differences.  The savings are bigger in certain parts of the country.

Fees also tend to be much lower at credit unions.  Credit card late fees or NSF fees which can range up to $35 at banks are typically $20-$25 at a credit union.  ATM usage fees which can be up to $2.50 per ATM transaction at major banks tend not to be as big an issue at credit unions due to large, cooperative ATM networks which include as many as 25,000 ATMs nationwide.

Most major credit unions offer all of the same services as big banks.  Online banking, free bill pay and investment services are common.  There are still a number of smaller credit unions in existence so be sure to ask about the services offered before you join.  To find a credit union in your area, visit the credit union locator page on the Credit Union National Association web site.

Smart shopping can save you thousands of dollars each year without much effort.  A savvy consumer can keep more money in their pocket by using a credit union versus a bank.

Comments

[noma]

Hosting the debt reduction carnival. Anything you'd like to submit?

Thanks,
Noma

[rdub98]

Hmmm.....On several occasions, I have posted that you should join a credit union. I work for a credit union and do all of my banking (ewww, I hate that word) there.

You really cannot beat them when it comes to low interest loans, higher interest investments (savings, certificates, and money markets), and low or no fees. Plus, it is becoming much easier to join a credit union because the field of membership (FOM) regulations are loosening more and more each year.

[FMF]

Noma --

I'll send in a submission later today.

[Ken]

I see three options for banking in terms of fee and rate differences for the consumer.

1. Traditional brick & mortar banks as discussed above
2. Traditional credit unions as discussed above
3. Online banks like ING

My question is that credit unions obviously pose a threat to traditional banking, but what threat do online banks pose to credit unions in terms of higher interest savings and checking, and mortgages, etc. if you put the issue of convenience aside.

BTW I think my above list also happens to be in order of decreasing convenience. I wonder if it is also in order of increasing financial return for customers. Not sure about that, though.

Thoughts?

[Matt]

There's one credit union I know of that basically anyone can join: Pentagon Federal Credit Union. Historically, you had to be an officer in the US armed services (+retired and family members) or a civilian employee in the Pentagon, but it's since expanded to include people who join the National Military Family Association (extra $20). https://www.penfed.org/membershipApplication/eligibility/elig10.1.2.asp

To gain access to most branches, you need to have a DoD ID, but don't worry: you never need to set foot in a branch. Since they serve military personnel serving around the world, you can do business with them over the phone (with a real, live person) around the clock.

I first turned to them when I needed a car loan and online lenders wouldn't work with me since I hadn't established credit yet. I wasn't about to let a dealership finance me, so I started looking for a credit union. No only did they give me a loan, but the rate was better than I could have gotten almost anywhere else.

I've since started working for a company that gives me access to another credit union, but it's not as good.

[rdub98]

Ken,

I don't see where online banks like ING are very much of a threat to credit unions. Because credit unions are all about service to their members, they provide services that online banks can't like personal face to face discussions on the best type of loan to use, or working with members to help in the event of a personal disaster. Banks and online banks typically don't care about the customer. They pretty much only care about their bottom line and how much money they can return to their shareholders. Because members own the credit union, credit union care about the members. Online banks may be able to provide higher savings rates or lower loan rates in some cases, but the personal service just isn't there as it is with credit unions. It is not always about the rates.

[JJ in Balt]

IMO, you have to shop around.

Credit Unions are like any other provider of service, their rates, customer service and options vary greatly. But it would be inaccurate to say they always have the best rates for consumer loans. My partner's car was financed by the dealer (BMW) and he got a 2% fixed rate on a 3 year loan - much better than anything his credit union could do. Also, the credit unions interest rate for traditional savings accounts just does not compare to online bank like ING. Don't get me wrong, I love credit unions (my parents ran a CU for 15 years) but you have to do your homework.

- jj

[Ken]

rdub98,

I hear what you're saying about service. But this blog entry was about making the switch to CUs for better rates. With that in mind, online banks typically offer better rates than CUs. Not always, but frequently. I am a member of a CU myself, and while the service is good, it is not very convenient (too few locations). And while their rates may be better than many national banks, they are not better than online banks.

I find that CUs are sort of stuck in the middle. Better rates than traditional banks; worse rates than online banks. More convenient than online banks, but less convenient than traditional banks.

I think the customer needs to ask what is most important to them and choose accordingly.
1. Convenience
2. Service
3. Rates

The answer won't be the same for everyone.

[Matt]

@jj:

You're right, in some circumstances, you can get a better rate through the dealership. This is especially true when--for instance--GMAC offers 0% financing to help Chevy move some cars when business isn't good. But then again, if they're that desperate, you can probably get them to come down on sale price (via rebates) anyway.

But to accept a financing deal from the dealership, you need to read the fine print very carefully and probably bring a laptop so you can use a spreadsheet to run through the scenarios. A lot of dirty tricks are possible with dealer financing. I've heard of cases where if you're one day late on a payment, they can repossess your car immediately. Another one is you pay all interest before paying any principal, so there's no point in making early payments. Now, this is especially typical of sub-prime auto loans, but ultimately you need to watch your back a lot more in a dealership. Financing with them makes the deal much more complicated than if you're just a cash buyer as far as they're concerned.

If you really want to get ripped of at a dealership, negotiate over monthly payments and down payment instead of sale price and interest rate.

In most cases, you can trust your credit union a lot better not to pack the contract with lots of sleazy fine print. This is especially true if you're a first time buyer or have less than stellar credit.

[Anitra]

I think Ken really got the point: it's a combination of rates, service, and convenience. Credit unions definitely have better service, but are middle-of-the-road on rates and convenience. My parents' credit union was the only place that would let me have my own checking account at 17, unlike traditional banks in our area; they even gave me pre-paid envelopes to mail in deposits. But when I got married, my husband and I switched to a local credit union. We've done a lot of business with them, but we currently have a high-yield savings account with an online bank, and our mortgage is with a large national bank. Why? In these cases, the credit union couldn't match the rates we can get elsewhere.