What is a Credit Union

A credit union is a cooperative bank, owned by its depositors, and usually charging lower rates of interest on consumer loans. In the United States, the credit union movement resulted from the growth of “loan sharking” or “predatory lending” in the late nineteenth and early twentieth centuries.

Loan sharking – lending money at extremely high rates of interest and service fees for consumption purposes – was a serious problem at the time. Interest rates charged by the “sharks” were usually in excess of 15%, approaching the rates charged today by credit card companies. The difference, of course, is that most states at the time still had “usury laws” on the books, and charging interest at more than the statutory limit was illegal. The last usury laws were removed in the 1980s, so that consumer loans – which is what a credit card extends – can charge interest at what the market will bear, and do it legally.

A credit union is designed as a way for poor and middle class people to pool their savings for mutual benefit, that is, to be able to lend one another money for consumer purchases when incomes are not adequate to meet family needs. It meets the legal definition of a bank, which is an institution that makes loans and takes deposits.

A credit union differs from a savings and loan in that a savings and loan is not necessarily owned by its depositors, and can make loans for residential real estate, whereas a credit union is restricted to making “small” consumer loans, such as for food, clothing, automobiles, and so on. A credit union differs from a commercial bank in that, while a commercial bank may, as a favor to its customers, make consumer loans, its reason for existence is to make business loans. A credit union differs from an investment bank in that an investment bank makes loans for the purchase of securities (i.e., stocks and bonds), while, again, a credit union was designed solely for consumer loans and savings.

Many of these distinctions have faded over time as banking regulations have been lifted. Many credit unions now charge interest rates on loans that are set by the market, and are not appreciably different from what can be obtained at a commercial bank or savings and loan. Some credit unions have transformed themselves into savings and loans, or into commercial banks, thereby defeating the purpose for which they were created.

Nevertheless, there remains an important role for credit unions to meet temporary cash needs of their members, as well as a convenient method of saving in a way that helps others. When financial and tax reforms such as capital homesteading are adopted and implemented, the role of credit unions should expand, as people become more involved in managing their own assets.