Credit Unions offer many advantages to their members; among these are low loan interest rates and easier loan acceptance. The Credit Union will offer lower interest rates if the member will bring his car loan and mortgage and signature loans and credit cards to the Credit Union. This arrangement works fine for the Credit Union member as long as everything is going well. It is when the member experiences financial hardships that this arrangement “shows its teeth”. Credit Unions can turn on you quickly at the first sign of trouble.
After a financial hardship has occurred and loans fall behind, the Credit Union will use the cross-collateralization agreement the member signed long ago (and may not have read). This means that the Credit Union can now take the member’s money from his checking and savings accounts to offset unpaid loans at the Credit Union. Members will find out that signature loans have unexpectedly taken the car and house as security. This means that once your car is paid off, the Credit Union keeps the car as collateral for any unpaid signature loans or mortgages!
Things get worse if the financial hardship grows worse and the member needs the protection of a bankruptcy. Many people find protection and relief in bankruptcy by eliminating credit cards and unsecured signature loans and keep paying their mortgage and car note. This works for people using traditional banks, where cross-collateralizations are rare. They keep the home and car and dump the bad debts. If you are member of a Credit Union this often does not work. The Credit union will demand that if you want to keep the mortgage and car loan with them, then you must also pay off the credit cards and signature loans: it’s all or none with a Credit Union!
I often advise my clients to empty their Credit Union checking and savings and open a traditional bank account to put the money into BEFORE they file for bankruptcy protection.