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A credit union is a nonprofit financial institution that offers products and services similar to banks, such as deposit accounts and loans. However, it may have certain requirements for membership, such as living in a certain geographic area or working in a specific profession.

If you are trying to figure out the kind of financial institution that suits you best, it may be valuable to consider credit unions vs. banks.

What Is a Credit Union?

Credit unions are financial institutions like banks, and they offer products you’d expect such as checking and savings accounts, loans, debit cards, checks, money orders, and more. They can provide apps and online access, just as banks do.

Credit unions may charge fewer fees, often with no minimum or a very low minimum deposit to open an account. In this way, they may be closer to online banks vs. traditional banks.

One difference between a credit union and a bank is that credit unions are run as coops, meaning each member has a stake in the business. Just like buying stock in a company, you own a small piece of the credit union when you join.

Here are some more features of credit unions:

•   These organizations are typically smaller than big banks and specific to certain locations, while offering similar services.

•   As nonprofits, credit unions are usually designed to serve their members, generally paying higher overall interest rates on deposits and with lower fees and penalties.

Typically, credit unions serve people only within their geographic area, and you need to be a member. Some credit unions have specific requirements for membership, but most make it easy to meet the qualifications, such as:

•   Where you work or your industry

•   Where you live

•   Where you attend school or worship

•   Which organizations you are a member of

Pros and Cons of Banks

Here are some of the upsides and downsides of keeping your money at a bank.

Pros of Banks

Consider these benefits:

•   One of the biggest overall benefits of choosing a bank, especially a major one, might be that they generally offer a larger array of financial products, including checking accounts and savings accounts, loans, and more. They can be your one-stop shopping for many financial needs.

•   Banks may have extensive networks of brick-and-mortar branches, possibly both nationally and internationally.

•   They usually have large ATM networks as well.

•   Banks are likely to be insured by FDIC (Federal Deposit Insurance Corporation), adding a layer of security in the very rare event of a bank failure.

•   Bigger banks can be quicker to adopt new technology, such as launching mobile check deposit.

Cons of Banks

In terms of the downsides:

•   Traditional banks may not offer as high interest rates as online banks or credit unions do.

•   Similarly, traditional banks vs. online banks and credit unions often charge higher fees.

•   A big bank may not provide as specialized, personalized services as credit unions do. Credit unions may provide ATM fee reimbursement and other perks.

Pros and Cons of Credit Unions

Now, take a look at the upsides and downsides of credit unions.

Pros of Credit Unions

On the plus side, credit unions can offer the following:

•   Credit unions typically offer many of the same services as banks, satisfying a range of client needs.

•   They may offer higher interest rates on deposit accounts than traditional banks because profits go back to the members.

•   The fees are often lower than at traditional banks, both on deposit accounts and other financial products. For instance, credit union vs. bank mortgages may have less costly fees.

•   Most credit unions are insured by the National Credit Union Administration, or NCUA vs. FDIC, which helps protect funds in the very rare event of a financial institution failing.

•   Credit unions are typically known for personalized service and may offer financial literacy classes and more to support their members.

Cons of Credit Unions

Now, some of the minuses:

•   Membership is required. It’s possible that a person may not qualify to become a member/shareholder.

•   Credit unions are typically local or regional; there may not be many options in a given area. Shared branch credit unions may, however, offer greater reach.

•   They may not offer the kind of 24/7 accessibility and extensive customer service options as major banks.

•   While many services are offered, they may not have all the bells and whistles that a bank offers, such as money transfer service (such as Zelle) or a next-gen app.

Recommended: Do Credit Unions Help You Build Your Credit Score?

Credit Union vs. Bank

Here’s a comparison of how credit unions vs. banks stack up.

Business Model and Pricing

Banks are for-profit enterprises while credit unions are not. Some banks may charge higher fees and interest rates to borrow money. They may have higher minimum deposit requirements as well and lower annual percentage yields (APYs) on deposit accounts.

Recommended: APY Calculator

Membership Requirements

Banks are open to all who can apply for and be approved for services. Credit unions, however, have requirements to join and become a shareholder. They might cater to members of the military or employees in a certain industry. Or they might simply charge a small fee. But there will be some requirement to be met.

Services

Banks are known for having a full array of services: various kinds of accounts, loans, and other financial products. Credit unions usually have diverse offerings but may not offer quite the breadth as they tend to be smaller institutions.

Customer Care

Credit unions may have the edge here; they are known for personalized attention and coaching to help members gain financial literacy and reach their money goals. A large bank may not be able to take such interest in each client.

Accessibility

Banks may offer many physical branches, 24/7 customer service, and a national and even international network of locations and ATMs. Credit unions are likely smaller and local, with more limited access.

Technology Tools

Larger banks tend to be more advanced in terms of technological innovation than credit unions. They may have state-of-the-art websites, apps, and services like money transfer services.

Here’s how these bank vs. credit union differences look in chart form:

Finding the Right Credit Union

If you think a credit union may be the right fit for you but are unsure where to start, you could ask your coworkers or neighbors if they use one and if they like it. Since a credit union is a local financial institution, word-of-mouth can make for valuable research.

You could also search in your geographic area, making sure to check the eligibility requirements, and nationally, if you’re able to use a different local branch as part of the network. Then, joining is just like opening up any other bank account if you meet the membership credentials. Additionally, a credit union account may allow you to do most tasks online or over the phone.

Recommended: Passive Income Ideas

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The Takeaway

A credit union is a nonprofit financial institution that offers many of the same products and services as a bank, with each account holder being a shareholder and often enjoying highly personalized service. However, credit unions may have membership requirements and may lack a major bank’s ATM network, accessibility, and tech features. Credit unions often have lower fees and higher interest rates than traditional banks, making them more similar to online banks in this realm.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

FAQ

Is it better to have a credit union or a bank?

Whether it’s better to have a credit union or a bank depends upon a person’s individual needs. If you need a financial institution with a national or global network of branches and ATMs, a bank might suit you best. If you are looking for personalized, local service, lower fees, and financial literacy training, a credit union might offer those features.

What is a disadvantage of a credit union?

One potential disadvantage of a credit union is that you need to qualify as a shareholder. This might mean that you need to live or work in a certain geographic area or work in a specific profession. Not everyone may qualify.

What are the biggest risks to credit unions?

The biggest risks to credit unions are similar to the biggest risks to banks. These include cyberthreats (hacking, for instance), uncertain interest rates, and the potential loss of deposits, although the latter is a very rare occurrence.

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SOBNK-Q125-036

REIT is the abbreviation for Real Estate Investment Trust, a type of company that owns or operates properties that generate income. Investors can buy shares of REITs as a way of investing in different parts of the real estate market, and there are pluses and minuses to this option.

While developing and operating a real estate venture is out of the realm of possibility for some, REITs make it possible for people to become investors in large-scale construction or other real estate projects.

With a REIT, an investor buys into a piece of a real estate venture, not the whole thing. Thus there’s less responsibility and pressure on the shareholder, when compared to purchasing an investment property. But there is also less control, and most REITs come with specific risks.

What Are REITs?

When a person invests in a REIT, they’re investing in a real estate company that owns and operates properties that range from office complexes and warehouses to apartment buildings and more. REITs offer a way for someone to add real estate investments to their portfolio, without actually developing or managing any property.

Many, but not all, REITs are registered with the SEC (Securities and Exchange Commission) and can be found on the stock market where they’re publicly traded. Investors can also buy REITs that are registered with the SEC but are not publicly traded.

Non-traded REITs (aka, REITs that are not publicly traded) can’t be found on Nasdaq or the stock exchange. They’re traded on the secondary market between brokers which can make trading them a bit more challenging. To put it simply, this class of REITs has a whole different list of risks specific to its type of investing.

Non-traded REITs make for some pretty advanced investing, and for this reason, the rest of this article will discuss publicly traded REITs.

💡 Quick Tip: All investments come with some degree of risk — and some are riskier than others. Before investing online, decide on your investment goals and how much risk you want to take.

Types of REITs

Real Estate Investment Trusts broadly fall into two categories:

•   Mortgage REITs. These REITs can specialize in commercial or residential, or a mix of both. When an investor purchases Mortgage REITs, they’re investing in mortgage and mortgage-backed securities that in turn invest in commercial and residential projects. Think of it as taking a step back from directly investing in real estate.

•   Equity REITs. These REITs often mean someone’s investing in a specific type of property. There are diversified equity REITs, but there are are specialized ones, including:

◦   Apartment and lodging

◦   Healthcare

◦   Hotels

◦   Offices

◦   Self-storage

◦   Retail

💡 If you’re interest in REITs, be sure to check out: What Are Alternative Investments?

Pros of Investing in REITs

Investing in REITs can have several benefits, such as:

•   Diversification. A diverse portfolio can reduce an investor’s risk because money is spread across different assets and industries. Investing in a REIT can help diversify a person’s investment portfolio. REITs aren’t stocks, bonds, or money markets, but a class unto their own.

•   Dividends. Legally, REITs are required by law to pay at least 90% of their income in dividends. The REIT’s management can decide to pay out more than 90%, but they can’t drop below that percentage. Earning consistent dividends can be a compelling reason for investors to get involved with REITs.

•   Zero corporate tax. Hand in hand with the 90% payout rule, REITs get a significant tax advantage — they don’t have to pay a corporate tax. To put it in perspective, many dividend stocks pay taxes twice; once corporately, and again for the individual. Not having to pay a corporate tax can mean a higher payout for investors.

•   Tangibility. Unlike other investments, REITs are investments in physical pieces of property. Those tangible assets can increase in value over time. Being able to “see” an investment can also put some people at ease — it’s not simply a piece of paper or a slice of a company.

•   Liquidity. Compared to buying an investment property, investing in REITs is relatively liquid. It takes much less time to buy and sell a REIT than it does a rental property. Selling REITs takes the lick of a button, no FOR SALE sign required.

Compared to other real estate investment opportunities, REITs are relatively simple to invest in and don’t require some of the legwork an investment property would take.

Cons of Investing in REITs

No investment is risk-free, REITS included. Here’s what investors should keep in mind before diving into REITs:

•   Taxes on dividends. REITs don’t have to pay a corporate tax, but the downside is that REIT dividends are typically taxed at a higher rate than other investments. Oftentimes, dividends are taxed at the same rate as long-term capital gains, which for many people, is generally lower than the rate at which their regular income is taxed.

However, dividends paid from REITs don’t usually qualify for the capital gains rate. It’s more common that dividends from REITs are taxed at the same rate as a person’s ordinary income.

•   Sensitive to interest rates. Investments are influenced by a variety of factors, but REITs can be hypersensitive to changes in interest rates. Rising interest rates can spell trouble for the price of REIT stocks (also known as interest rate risk). Generally, the value of REITs is inversely tied to the Treasury yield — so when the Treasury yield rises, the value of REITs are likely to fall.

•   Value can be influenced by trends. Unlike other investments, REITs can fall prey to risks associated specifically with the property. For example, if a person invests in a REIT that’s specifically a portfolio of frozen yogurt shops in strip malls, they could see their investment take a hit if frozen yogurt or strip malls fall out of favor.

While investments suffer from trends, REITs can be influenced by smaller trends, specific to the location or property type, that could be harder for an investor to notice.

•   Plan for a long-term investment. Generally, REITs are better suited for long-term investments, which can typically be thought of as those longer than five years. REITs are influenced by micro-changes in interest rates and other trends that can make them riskier for a short-term financial goal.

💡 Quick Tip: Distributing your money across a range of assets — also known as diversification — can be beneficial for long-term investors. When you put your eggs in many baskets, it may be beneficial if a single asset class goes down.

Are REITs a Risky Investment?

No investment is free of risk, and REITs come with risks and rewards specific to them. As mentioned above, they’re generally more sensitive to fluctuations in interest rates, which have an inverse influence on their value.

Additionally, some REITs are riskier than others, and some are better suited to withstand economic declines than others. For example, a REIT in the healthcare or hospital space could be more recession-proof than a REIT with properties in retail or luxury hotels. This is because people will continue using real estate associated with healthcare spaces regardless of an economic recession, while luxury real estate may not experience continued demands during times of economic hardship.

Risks aside, REITs do pay dividends, which can be appealing to investors. While REITS are not without risk, they can be a strong part of an investor’s portfolio.

Investing in REITs

Investing in publicly traded REITS is as simple as purchasing stock in the market — simply purchase shares through a broker. Investors can also purchase REITs in a mutual fund.

Investing in a non-traded REIT is a little different. Investors will have to work with a broker that is part of the non-traded REITs offering. Not any old broker can help an investor get involved in non-traded REITs. A potential drawback of purchasing non-traded REITs are the high up-front fees. Investors can expect to pay fees, which include commission and fees, between 9 and 10% of the entire investment.

The Takeaway

Investing in REITs can be a worthwhile sector to add to your portfolio’s allocation. They carry risks, but also benefits that might make them a great addition to your overall plan.

After all, REITs allow investors to partake of specific niches within the real estate market, which may provide certain opportunities. But owing to the types of properties REITs own, there are inevitably risks associated with these companies — and they aren’t always tied to familiar types of market risk.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

An investor should consider the investment objectives, risks, charges, and expenses of the Fund carefully before investing. This and other important information are contained in the Fund’s prospectus. For a current prospectus, please click the Prospectus link on the Fund’s respective page. The prospectus should be read carefully prior to investing.
Alternative investments, including funds that invest in alternative investments, are risky and may not be suitable for all investors. Alternative investments often employ leveraging and other speculative practices that increase an investor's risk of loss to include complete loss of investment, often charge high fees, and can be highly illiquid and volatile. Alternative investments may lack diversification, involve complex tax structures and have delays in reporting important tax information. Registered and unregistered alternative investments are not subject to the same regulatory requirements as mutual funds.
Please note that Interval Funds are illiquid instruments, hence the ability to trade on your timeline may be restricted. Investors should review the fee schedule for Interval Funds via the prospectus.