How are credit union rates determined? A CEO shares.

Have you ever checked out credit union rates and thought. . .your deposit rates are awfully low or your loan rates are too high?  It’s understandable to always want the best rate available to have a low cost loan, and we strive to provide that as often as possible.  In fact, at any given time, you will likely find that at least one of our loan rates or one of our deposit rates are among the best in the markets we serve.  However, it is very unlikely that we could ever offer the highest deposit rates and the lowest credit union loan rates across the board.

The Federal Reserve sets the bar

It all starts with market rates as established by the Federal Reserve.  The Fed Funds rate serves as an index for overnight or short-term deposits.   The Fed Funds rate (currently near zero!) establishes what the credit union can earn on its own ovLow cost loanernight deposits which are used to fund your daily transactions.    We can do one of two things with your deposits – we can invest them in Treasury or Agency securities or we can lend them to other members in the form of auto loans, mortgages, etc.  Because we are earning so little on our deposits, we are very limited in what we can pay our members.

A stronger CU

Loans are our main source of income, so it is vitally important that we price loans to not only attract a lot of borrowers but also to cover our costs and make a small profit.  So, when pricing loans we start with the costs associated with loans – the cost of funds (the yield we are paying on deposits), servicing costs (the operating costs related to processing and servicing the loan) and loan losses (the loss ratio we experience when people can’t pay back their loans).   We add these yields and ratios together to establish the “break-even” rate; then we add a little cushion for profit.   Keep in mind that all of our “profits” (net income) go directly to reserves in order to build a stronger credit union and serve you better.

Maximize returns

The credit union lives off of the difference (spread) between what we pay out and what we earn.   Our stated objective is to maximize our returns to members.  Unlike banks, we are not trying to maximize profits.   Yet, like any company, we need to achieve some profitability just to keep growing, adding services and strengthening the credit union.  It is a true balancing act to please both depositors and borrowers simultaneously.

Simple, transparent pricing

As you look at deposit rates and loan rates that are often published in newspapers, you will note that there is usually a very narrow spread between the lowest rates quoted and the highest rates quoted.  This is because all financial institutions price deposits and loans in a similar fashion as I’ve described above.  When you see a rate that is far above or far below the average, look out for the fine print!  Many times the best rates come with a catch such as a high minimum deposit or a large down payment, in the case of a loan.  We, at Unity One, believe in simple, transparent pricing with no fine print and we believe in offering consistently competitive rates with the occasional rate special to reward our members.

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