How Credit Unions Calculate Loan Rates
Credit unions do not set interest rates at random. They rely on rules, analyze precise data, and
must follow the limits established by law. It is also important for them to maintain balance: to
offer fair terms to their members while keeping the organization financially stable. To
understand why you are offered a particular rate, you need to know how a credit union
evaluates risks, considers the cost of funds, follows legal requirements, and takes the needs of
its members into account.
How Credit Unions Set Their Lending Philosophy
Each credit union develops its own approach to loan issuance. This approach is reflected in the
board of directors’ documents, internal rules, and strategic plans. It determines how strictly or
flexibly the organization will set interest rates and how it will make loan application decisions.
Most credit unions have three main goals. First, they want to offer their members loans at fair,
affordable rates that are often lower than bank rates. Second, they need to maintain the
organization’s stability and safety so that members’ deposits are protected, and the credit union
meets the capital requirements set by the National Credit Union Administration (NCUA). Third,
credit unions aim to remain competitive in their local markets so members do not turn to other
lenders.
The board of directors approves the credit policy, which sets goals for yield, acceptable risk
levels, and general pricing rules. Management and the lending department then use these rules
when setting rates for auto loans, personal loans, credit cards, and other products. Many credit
unions also provide discounts to long-standing or active members, because they are both
customers and owners of the organization.
Factors That Influence a Credit Union’s Loan Rates
Several factors influence loan interest rates. Some are related to the borrower, while others
depend on the economy, the market, or legal requirements.
Usually, the rate is influenced by the following elements:
- the target federal funds rate and the Federal Reserve’s prime rate — they set the overall
cost of borrowing across the country; - the cost of funds for the credit union, including interest paid on deposits and borrowed
funds; - expected credit losses, calculated based on data from similar loans;
- operating expenses: staff salaries, technology costs, and regulatory compliance;
- the level of return that needs to be maintained to preserve capital and meet regulatory
requirements; - competition from banks, online lenders, and other credit unions.
Based on these factors, the lending team calculates the base rate. Usually, the process looks
like this: they start with the cost of funding, then add an amount for expected losses, operating
expenses, and a small profit margin. The result becomes the base rate, which is then adjusted
based on each borrower’s individual risk.
How Member Ownership Affects Pricing
Credit unions operate as cooperatives — they are owned by their members, not by outside
investors. Because of this, their approach to setting interest rates differs from that of banks.
Instead of paying dividends to shareholders, a credit union returns value to its members. This
may come in the form of lower loan rates, higher deposit rates, or reduced fees. According to
NCUA data, credit unions, on average, offer lower rates on common loan products than banks.
For example, in 2025, the average rate on a three-year personal loan at credit unions was in the
lower double-digit range. At the same time, banks and many online lenders were charging
higher average rates for similar unsecured loans.
Since members of a credit union are also its owners, boards of directors often choose a more
modest profit margin; their goal is to cover expenses, preserve capital, and maintain steady
growth. This is why many borrowers, once they become eligible for membership, find more
favorable terms at credit unions.
How Credit Unions Assess Risk
The interest rate always depends on the level of risk. A credit union must understand the
likelihood that a borrower will make late payments or be unable to repay the debt. The higher
the risk, the higher the rate, but only within the limits allowed by law. This approach is called
risk-based pricing. It is widely used and permitted under NCUA guidance and the Equal Credit
Opportunity Act, provided it is applied without discrimination.
To assess risk, credit unions use internal models, credit ratings from major bureaus, and the so-
called “five Cs of credit”: character, capacity, capital, collateral, and conditions. These data are
compared with the credit union’s own statistics to group borrowers by risk level. Each group has
its own rate. People with strong credit histories and stable profiles receive the lowest rates.
Those with weaker histories or less predictable income pay more.
Federal law also strictly limits how risk analysis can be applied. The Equal Credit Opportunity
Act and Regulation B prohibit setting different rates based on protected characteristics such as
race, sex, or age. That is why credit unions must rely only on neutral factors, such as credit
history and income, to document their models and ensure that borrowers with similar profiles
receive the same terms.
Credit Score and Credit History
A credit score is one of the main indicators that credit unions use to evaluate borrowers. They
usually rely on FICO or VantageScore models, which Equifax, Experian, and TransUnion
calculate. A high score shows that a person pays on time, uses credit responsibly, and keeps
their debt level under control. A low score, on the other hand, indicates frequent late payments,
a high balance, or a short credit history.
To determine the interest rate, lenders divide borrowers into groups based on their credit score
level. For example, the best rate is available to those with a score above a certain threshold.
Average rates go to borrowers with a mid-range score. The highest rates are assigned to those
with a low score. Industry data shows that people with excellent credit histories often receive
rates several percentage points lower than borrowers with average or poor credit.
But a credit history is not only a number. Underwriters also consider other details: how long the
accounts have been open, how often late payments have occurred, what types of credit the
person has, and whether there have been bankruptcies or collections. A long, stable credit
history can sometimes offset a slight drop in the score. Serious negative records, however, can
lead to worse loan te rms even if the score has partially recovered.
Debt-to-Income Ratio
The debt-to-income ratio (DTI) shows the percentage of your monthly income that goes toward
debt payments. Banks and credit unions use this indicator to understand whether you can
handle a new payment. To calculate DTI, the lender adds up all your monthly debt payments: a
mortgage, an auto loan, student loans, credit cards, and personal loans, and divides this
amount by your gross monthly income.
The lower the DTI, the lower the lender’s risk, because the borrower has more free money left in
the budget. If the ratio exceeds a set threshold, the risk becomes higher. Each credit union can
set its own DTI limits for different products. If your ratio is close to the upper limit, the loan can
still be approved, but the interest rate will be higher to account for the additional risk.
Loan Purpose and Term
The interest rate is influenced not only by the borrower’s credit history but also by the loan term
and the loan’s purpose. Short-term loans are considered less risky because the funds are
issued for a short period and the credit union recovers them sooner. Long-term loans carry
more uncertainty: the borrower’s income, the economic situation, or market rates may change
over several years. Because of this, such loans are usually more expensive.
Secured loans, such as auto loans where the vehicle serves as collateral, usually have lower
rates than unsecured personal loans. Collateral reduces the credit union’s risk because, if the
borrower cannot meet their obligations, the credit union can recover part of the value. Loans for
purposes that retain their resale value well, for example, new-car loans, are often issued on
better terms. Meanwhile, items that lose value quickly or have no collateral at all are financed at
higher rates.
How APR Is Determined
The annual percentage rate (APR) is a simple way to show how much a loan really costs over
the course of a year. The law requires lenders to disclose the APR so that consumers can easily
compare different offers.
APR is calculated as follows: the credit union takes the product’s base interest rate, considers
the borrower’s risk level, and adds all prepaid costs. These may include, for example, an
origination fee or mandatory credit insurance, if included in the loan cost. As a result, APR
shows the total cost of the loan, including interest and fees, as a single annual rate spread over
the entire loan term.
If the loan includes additional payments that must be made up front, the APR is usually higher
than the simple interest rate. If there are no extra costs, the APR may match the interest rate.
Understanding this difference helps you determine which loan is truly more affordable, even if
the interest rates look the same at first glance.
How Fees and Add-Ons Affect the Final Rate
Fees and additional services can significantly affect the total cost of the loan. Some credit
unions charge an origination fee for personal loans or a processing fee for auto loans. In other
cases, the initial down payment may be low, but a significant part of the cost is actually built into
the interest rate.
Additional services include credit life insurance, disability insurance, and vehicle extended
warranties. Sometimes they can be useful, but they still increase the loan’s total cost. If the price
of these services is included in the loan amount, it increases the amount financed and the
interest charged, thereby raising the annual percentage rate (APR).
That is why it is important to review every fee and every additional service carefully. The
disclosure documents must clearly indicate which charges are mandatory and which are
optional. This helps borrowers understand whether the offer remains beneficial after all extra
costs are taken into account.
How Federal and State Regulations Affect Rate Limits
Credit unions are required to follow legally established interest rate limits. For federal credit
unions, this limit is set by the NCUA Board. From 2024 through 2026, the maximum rate for
most loans is 18% APR. Some special products may follow different rules, but standard
consumer loans cannot exceed this limit.
State-chartered credit unions must also comply with state usury laws and the rules of their
regulators. All lenders must follow federal laws such as the Truth in Lending Act and the Equal
Credit Opportunity Act. These laws regulate disclosures, borrower protections, and the use of
risk-based pricing.
Because of these requirements, a credit union cannot simply raise the rate above the legal cap,
even for high-risk borrowers. Instead of increasing the rate, the credit union adjusts other terms,
such as the loan amount, collateral requirements, or approval criteria.
NCUA’s decisions on maximum loan rates are made publicly after reviewing economic
conditions. Recent memoranda explain why the 18% cap was extended through 2026, citing
inflation, higher funding costs, and the need to support small credit unions that serve higher-risk
members.
How Members Can Qualify for a Better Rate
Members of a credit union who understand how interest rates are formed can partly influence
the terms they receive. Several simple steps can help improve the rate.
Try always to make your payments on time. Your payment history has a strong effect on your
credit score. Reduce credit card balances to lower your credit utilization. Avoid opening multiple
new accounts in a short period, as this may be perceived as an increased risk.
Work on lowering your debt-to-income ratio: pay down existing debts or increase stable income.
Offer collateral, for example, a vehicle or a share-secured loan using a deposit account.
Collateral reduces the credit union’s risk and can help you qualify for better terms.
It is also useful to maintain an active relationship with the credit union: use direct deposit, keep
savings there, and use their services. Some credit unions offer rate discounts for long-term or
active members.
It is also worth asking whether the credit union provides discounts for automatic payments or for
a certain membership level. Even a small rate reduction can affect the loan’s total cost.