Is It Better To Refinance a Car With a Credit Union?

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There’s no shortage of lender options to refinance your car loan. Is a credit union best for you?

So, you’re in the market for a new auto loan. Maybe your credit has improved since you first bought your car. Or perhaps you’re unhappy with your current lender. There’s no shortage of financial institutions at your disposal nowadays, especially when it comes to lending.

While banks often have the most recognizable brands, it’s easy to overlook a very viable option: credit unions.

Credit unions are widely accessible and can offer numerous services to suit your financial situation. That includes an auto refinance loan. But before we dig into whether or not it’s best to refinance a car with a credit union versus other institutions, let’s quickly walk through the refinancing process.

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What Is Refinancing and Why Should I Care?

Getting a new loan is similar to buying a new car.

What happens when you need a new car? Although digital platforms like Carvana are mixing things up, the traditional approach is to visit a dealership and explore a variety of new and used cars. Ideally, your new car would have better features, gas mileage, and longevity.

When it comes to refinancing, instead of upgrading your ride, you’re upgrading your car loan.

Auto loan refinancing is the process of replacing your existing loan with a new one — and perhaps even a new lender. In most cases, the primary goal is to secure a lower interest rate and, in turn, reduce your monthly payment. You may also land a lower monthly payment by extending your loan term, though this can lead to higher total interest over the life of the loan.

How much can you save? According to the RateGenius 2022 State of Auto Refinance Report, the typical borrower who successfully refinanced last year cut their rate in half — from 14% to 7%. This led to average annual savings of $1,158. Not too shabby. 

What to Know About Refinancing a Car Loan With a Credit Union

So, you’re considering credit unions for an auto loan refinance — let’s discuss what you should know about this type of institution.

Unlike your typical bank, credit unions are exclusive. You have to be a member to access their products and services. And as a member, you’re also a co-owner with voting rights. For instance, you may have the ability to vote on who’s elected to your credit union’s board of directors.

Eligibility varies by credit union, but it’s typically based on some sort of demographic factor. USAA and Navy Federal Credit Union memberships are reserved for military members and certain family members. Whereas Georgia United Credit Union caters to individuals in the state of Georgia.

The next most notable feature of credit unions is their business model — they’re nonprofits. As a result, they’re more inclined to offer low rates on loans to maximize value for their members.

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Advantages of credit unions

Customer service. Credit unions are frequently renowned for their customer service. Since they’re run by members, for members, there’s a heavy emphasis on personalization and catering to individual needs. According to the American Customer Satisfaction Index, credit unions historically perform best in the category of “Courtesy and helpfulness of tellers or other staff.”

Nonprofit status. Credit unions aren’t incentivized to charge excessive interest rates and rake in profits. As such, they may be able to return value to members in the form of lower interest rates and reduced fees.

Branches. Some people still prefer the in-branch customer experience when it comes to managing their finances. Although not as prolific as the largest banks, many credit unions participate in shared branching — credit unions partnering to offer shared services to their collective members.

Disadvantages of credit unions

Eligibility. For starters, you may not qualify for membership, which means you can’t access a particular credit union’s offerings — whether that’s credit products, personal loans, or refinancing options.

Fewer products and services. Generally speaking, credit unions may not provide as many financial solutions compared to banks. For instance, your credit union may not issue vehicle loans — or even refinance loans. But that depends on the institution.

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Credit Unions vs. Dealerships: Which Is Best for Refinancing?

If you’ve gone through the car buying process before, chances are you’re familiar with car dealerships. However, you might not be aware of how dealerships make money, which can influence your auto loan rates and loan payment.

Unlike credit unions, dealerships are for-profit businesses. They may use incentives to get you in the door, but they aren’t guaranteed to offer the best rates.

Part of the reason is that car dealers are franchised, meaning they aren’t under the corporate umbrella of whatever automotive brands they sell. So, they maintain discretion over how much to charge for their vehicles and, in many cases, how much to charge for financing.

How dealerships compare to credit unions for auto loan refinancing

Convenience. Dealerships can be a one-stop shop when it comes to buying a car. With a wide selection of vehicles, they can help you find the right car. And once you’ve chosen your ideal ride, they can help facilitate the purchase by providing financing.

In terms of convenience, dealerships likely have the leg up if you’re already doing business with them. But that assumes their lending programs even offer refinance loans. Regardless, it would be wise to explore different institutions to compare rates and terms.

Potentially less stringent requirements. Dealerships aren’t known for offering the best interest rates on the market. That said, they’re usually less stringent about qualifying for financing. For instance, they may be willing to accept subprime credit scores in exchange for a higher interest rate. (Be wary of restrictive terms though, like prepayment penalties.)

Credit unions typically have minimum credit score thresholds, but the trade-off may be better rates if you do qualify for refinancing.

Credit Unions vs. Banks: Which Is Best for Refinancing?

Banks are a common personal finance fixture, starting with checking and savings accounts. But that’s only a small segment of the banking sphere. Many banks offer custodial services, lending, financial planning, and wealth management services too.

The biggest difference between banks and credit unions is their business model — banks are for-profit institutions, while credit unions are nonprofits. This can impact auto loan refinancing.

How banks compare to credit unions for auto loan refinancing

Products and services. Since banks strive to generate profits for shareholders, they usually offer a comprehensive selection of products and services. So, if you like having your bank accounts, credit cards, investments, and loans all under one roof, then banks are a convenient way to do so. 

That’s not to suggest that credit unions are limited in this area. Just that banks can have an advantage in terms of resources.

Low interest rates. Rates vary by institution, not to mention the fact that they fluctuate as market conditions change. Still, banks compete with one another for your business through competitive pricing, which is why it’s worth shopping around to find the best rates at the time.

Comparatively, credit unions are sometimes able to extend more competitive rates because they aren’t prioritizing profits — they’re focused on delivering value to members.

Mobile apps and digital platforms. The banking industry has undergone a pretty radical transformation over the last 20 years, heavily investing in mobile apps and online banking interfaces. Digital-focused banks can provide an omnichannel experience, which can make managing your finances easier.

Relative to credit unions, banks may have larger budgets for digital initiatives and IT infrastructure. But, of course, digital capabilities are equally subjective when it comes to comparing the two.

Physical branches. Large banks generally have a massive system of branches. If you prefer an in-person experience, you may have an easier time finding a convenient bank branch versus a credit union.

What rate can I get? What rate can I get?

3 Things To Know Before You Refinance With a Credit Union 

By this point, you might be itching to refinance with a credit union. Before you fill out any applications, there are a few things you should keep in mind.

1. Refinancing impacts your credit

It’s a common question — does refinancing hurt your credit? Yes and no.

When you apply for loans, lenders will pull your credit report to gauge your credit history. This triggers a hard credit inquiry, which will hurt your score (albeit only slightly).

Moreover, if you’ve had your current auto loan for a while, your scores have likely benefited from the account’s age. (The longer you have accounts open in good standing, the better.) By refinancing, you close the original loan and originate a new one. While closed accounts still contribute to your credit history, open accounts typically receive more weight in scoring models.

On the other hand, refinancing can actually improve your creditworthiness over time, so long as you make timely repayments.

2. Qualifying isn’t guaranteed

When it comes to refinancing with a credit union, qualifying is two-pronged. First, you have to qualify for membership. Second, you have to qualify for a new loan. Neither is guaranteed.

If you have bad credit, you may have some work to do before you can get a refinance loan. Fortunately, there are plenty of ways to bolster your financial profile, such as improving your credit, paying off debt, and padding your income with a part-time job.

3. Shop around regardless

We can compare different financial institutions all day — but here’s the fact of the matter: it’s best to explore your options. That remains the case even if you’re partial to a credit union. Why? Because rate shopping is paramount to getting the lowest interest rate and best loan terms.

Before you make any decisions, compare the loan rates of several types of lenders. Consider using a lending marketplace like RateGenius to find the most competitive rates and, in turn, the lowest car payment.

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