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. 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, 2.04% less than banks on used car loans (as of December 20, 2005) according to Datatrac, an industry rate tracking service. That would mean savings of $600 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.