cost of credit union borrowing

Re: Making sense

Just came across one credit union which allows it's members to make unlimited international calls at national rates. Now that's what I call a great service.
 
Re: Making sense

Hi Brendan
According to your post in Value of APR thread you have contacted +/- 1% or 2% of the 500+ independent, autonomous credit unions in the country but you are still willing to make sweeping statements like "...Credit Unions are expensive places to borrow from when compared to banks...". You do qualify the statement with a qrudging "...some credit unions may be cheaper..."
Based on such a small sample of CU's and the very limited response you received how can you be so sure that your general rule is best for most people?
On balance, 2 positives (ASTI and Lahinch[I must have missed that one]) from a sample of <10(?), would suggest that there may be 100+ CU's that may be better value than banks.

As for misleading advertising...
I shudder to think how many people were mislead by BOI's online calculator.
 
Still no response from Sandymount, but another manager confirmed Crugers description of how they calculate interest.

The "rate" is applied, not to the reducing balance, but to the reducing principal. Interest is not charged on interest.

So the APR is higher for those who pay weekly than it is for those who pay monthly. And it's lower again for those who default on their payments or farmers who might make two or three payments a year.

Some Credit Unions do not want deposits although they can't say this publicly. They are overflowing with deposits because they are generally much better value than the banks. These Credit Unions encourage their members to withdraw their savings and to borrow only the net amount.

Brendan
 
Re: Making sense

Interesting that AIB has embarked on a major advertising campaign to try and capture some of the savings market without making their savings products more attractive to savers. Maybe the CUs could teach them something?
 
Hi Brendan
"...So the APR is higher for those who pay weekly than it is for those who pay monthly. And it's lower again for those who default on their payments or farmers who might make two or three payments a year...."

I'm having difficulty reconciling this statement to what would actually happen.
Take a €10k CU loan over 3 years as the base.
Repaid weekly expect to pay €1354.98 interest over the term.
Repaid monthly expect to pay €1387.50 interest over the term.
Repaid 6 monthly expect to pay €1575 interest over the term.

So the actual interest paid is lower for those who pay weekly than it is for those who pay monthly. And it's higher again for those who default on their payments or who might make two or three payments a year. (Lets leave the farmers out of it for now, it is complicated enough...)
Phew! Where do we go from here?
 
Re: Making sense

this is addressed to crudgers regarding the "interest in not charged on interest" claim on the way credit unions do their calculation. to make it simple, suppose i've borrowed 3000 over three years at this "simple interest" rate of 10% say. i go in at the end of the first year with 1000 euros and tell them that that's all i have and i can't afford to pay back the interest but i'll have no problem paying everything next year as you've a good tip for the grand national. i was told when i took out the loan that credit unions don't charge interest on interest so i'm expecting there'll be no problem if i just add the 300 quid in interest owed to my payment next year?

somehow, i don't think it would be as simple as this, and if it isn't then isn't it disingenious to claim "interest isn't charged on interest"?

in your reply to brendan, you actually confirm his point. the interest is higher for the person paying back weekly, albeit by only a very small amount.

normally i'd be the last person to stand up for banks but as far as your shuddering in concern for the users of the boi calculator is concerned, you'll be relieved to know that you can rest assured. the response i got from them made it clear that the calculator was overestimating the repayments, so in actual fact, if anything, the mistake in the calculator actually damaged their business. in fact it affirms the binding nature of apr quotations. if web based caclulators were around years ago, they would have quoted an arbitrary number which they would call an "interest rate". they would not be obliged to tell you what this figure represented nor how it related to repayments. a bit like the credit unions really.
 
Re: Making sense

Hi darag
My statement that “…interest is not charged on interest…” is not a claim, it is a fact. Charging interest on interest would be contrary to the provisions of The Credit Union Act that specifies:
38.—(1) ( a ) the interest on a loan shall not at any time exceed one per cent. per month on the amount of the loan outstanding at that time;
As I explained before interest is only charged on the “…amount of the loan outstanding at that time…”, nothing else!

From the contents of your hypothetical scenario you seem to have a very low opinion of procedures within CU’s. I think you would probably get the same reaction from any lending institution if you proposed to change your repayment schedule unilaterally. If you originally were granted a loan of €3k from a CU you would have signed a promissory note detailing how and when you would make repayments. If you hit hard times, and couldn’t meet your commitments, I would expect you would receive more sympathetic assistance and treatment from a CU’s than from some other institutions. However I would leave out the Grand National bit as most financial institutions don’t rate the gee-gees as a good bet!;)

“…in your reply to brendan, you actually confirm his point. the interest is higher for the person paying back weekly, albeit by only a very small amount…”
The other thread title “Value of APR” is very relevant at this point. APR has absolutely no application when it comes to financial institutions calculating the interest due on a loan. I think what you meant to say was that I confirmed Brendan’s point that the APR is higher for the person paying weekly, albeit by only a very small amount. That is the point I was making. It seems that for CU loans the “Value of APR” calculations is distorted to the point of being inverted. Where the interest paid is lowest the APR calculation is highest and visa versa.

“…they would have quoted an arbitrary number which they would call an "interest rate" they would not be obliged to tell you what this figure represented nor how it related to repayments. a bit like the credit unions really …”
Calling the interest rate “…an arbitrary number…” is incredulous! The interest rate is the multiplier used by all financial institutions to calculate what they will charge you!
The Consumer Credit Act obliges financial institutions to display only the APR because it includes (or should include) all costs not just the multiplier for calculation of interest due alone. That is why financial institutions other than CU’s are required to quote APR.
In the case of CU’s the Credit Union Act specifies that:
38.—(1) A credit union may charge interest on loans made to its members under section 35 subject to the following conditions— ( b ) the interest on a loan shall in every case include all the charges made by the credit union in making the loan;
 
Re: Making sense

crugers, i have given up on you in the apr discussion but you've actually raised some points worth discussing here.

first of all, the point of my example is that the "no interest charged on interest" claim is meaningless unless it applies in the type of scenario i suggested. imagine two guys sitting at a bar - one says to the other that they've just borrowed 10 grand over three years. the second says turns around and says he's done the same. the first guy says "it's costing me 213 quid a month in repayments" - the second guy is very surprised by this and says "that's exactly what i'm paying!". the first guy goes "are you paying interest on the interest? 'cause i'm not." the second goes "jaysus, i'd better check otherwise i might be getting ripped off here". is the first guy supposed to feel he's gotten a better deal here?

i'm sure credit unions can be more understanding than other institutions when it comes to rescheduling repayments but, then again, in many cases this is because they can afford to be when the real rate of interest (factoring in the mandatory savings) is actually quite high. credit card companies are also very understanding when people carry over large balances from one month to the next.

saying "apr has absolutely no application" for financial institutions when it comes to calculating interest on a loan is ludicrous. the most fundamental and simple principle of finance is called the "time value of money" which is captured by the standard formulae for interest which is the basis for apr. this is first page stuff in any book on finance and you can be sure that anyone with a job in finance knows this principle.

finally an "interest rate" which doesn't include all the charges associated with the loan is just an arbitrary number. there are many interest rates and they will differ depending on how they are calculated but apr is based on continuously compounded interest which is the only measure of relevance as far as any financial analysis is concerned.
 
Re: Making sense

Hi darag

€10k at €213 for 36 months!!! They are both getting an absolutely fabulous deal and I wouldn’t give monkeys about the interest! But I presume that’s not the point you were making!

It is your example, you tell me. Should the first guy, or the second guy, or neither guy, feel he is getting a better deal? To pervert one of Fr Jacks catchphrases “That would be an 'economical' matter!”.

As for the credit union and the credit card:
If you have a credit card and they charge an interest rate (not APR) just a plain old vanilla interest rate of 9%. And if you are a member of a credit union that charge an interest rate (not APR) just a plain old vanilla interest rate of 9%.
If you go out and purchase something on your credit card for €100. (I don’t want to complicate matters by factoring in how much free days credit it is possible to get depending on when your merchant presents the CC charge and whether you are billed mid month etc…) For simplicity’s sake, if that’s not an unknown factor in these discussions, your credit card company tell you at the end of the month that you owe €100. Now at around the same time you took out a loan from your credit union of €100.
Your next bill from the CC would say that you owe €100 + €100*9/12. The following bill from your CC would say you owe (€100 +€100*9/12)*9/12. And the following bill would be ((€100+€100*9/12)*9/12)*9/12 and so on. In other words you would be accumulating interest charges on principal and interest. At the end of 12 months you would owe €109.38.
In the credit union after 1 month you would owe €100 +€100*9/12. At the end of the following month you would owe €100 +€100*9/12 +€100*9/12. It would increase by €100*9/12 each month and at year-end you would owe €109.00.
I’m not trying to prove that the credit union is cheaper here I’m just illustrating the different method used in CU for calculating interest. Credit cards compound your interest each month and left unpaid they will charge you interest on it. Credit unions don’t ever compound your interest and never charge you interest on it.
Credit Card companies wouldn’t exist if we were all cute hoors and paid back our balances on time. They exist, mainly, to exploit the many who let it run for one reason or another. Credit unions if true to their principles are mutual based. The theory is great. The question whether they are all still 100% faithful to these principles, in the best possible manner, is debatable. But that’s for another thread, another day! But even at their worst I think I'd opt for the CU before the CC, even at their best! There is no comparison between the two, if you'll excuse the non-sequitur!

“…saying "apr has absolutely no application" for financial institutions when it comes to calculating interest on a loan is ludicrous…”
No! ‘fraid not!
If a financial institution calculated the interest due using the APR it would actually distort the APR. At day, week, month or year-end, whenever the interest on a loan is calculated the APR figure is not used to calculate it. Going back to the CC and CU example above. The credit card interest rate is 9% but it’s APR is 9.38%. The 9.38% is not used in the calculation by the CC company just the 9%. Again not blowing the CU’s trumpet but the APR just happens to be 9% and the interest rate 9% but it is the interest rate of 9% that is used in the calculation of the interest due!

“…apr is based on continuously compounded interest which is the only measure of relevance as far as any financial analysis is concerned…”
Yup! Won’t argue with the thrust of that.
However its application, in its present form as detailed in the Consumer Credit Act 1995 does not easily fit with analysis of the cost of loans from CU’s.
As laid out in the Credit Union Act 1997 the interest charged on CU loans must include all charges. So when a CU approves a loan for €100 at 9% rate of interest that means you will only be charged a maximum of €9.00 during that year. If you pay back some of the loan during the year you will only be charged 9% rate of interest on the amount of the loan, and only the loan, that remains unpaid.
 
credit card borrowing

The UK credit card borrowing is now 54 billion according to the bbc news. Does anyone know what it is in Ireland.
 
Re: Making sense

Hi Joan,

€7.6bn was spent on credit cards in Ireland last year according to this article in last weekend's Sunday Indo. (registration req.)
 
Re: Making sense

If you have €2000 in the CU and you borrow €10000.
The CU locks in the €2000, so you have actually borrowed €8000

(You loan them €2000, they loan you 10000,
so you've borrowed €8000 Net).

But you are paying interest on the €10000, not the €8000.

That's it, end of story let's all move on.

-Rd
 
Re: Making Sense

If only it was that simple!
But, yes lets move on!
Next: The Value of Saving in CU's?
;)
 
Re: Making Sense

Saving with the CU is fine. They tend to offer a better rate than the banks for a demand deposit.

If you feel like engaging in Tax evasion they are happy to turn a blind eye. ;)

Personally I think given the limits on the amount you can deposit, and the social benefits of CU's there shouldn't be DIRT on CU savings, but given that there is the CU's shouldn't offer the option to people of declaring the interest themselves.

On a broader issue, I'd put a ceiling on savings before you start paying DIRT in any institution, say €50,000. And I'd introduce DIRT on debt, so you'd be taxed more for taking out debt with high interest rates.

i.e. Tax things we don't want people doing (debt), and encourage things we do want (Savings). All the money raised from the Debt Tax should be ring fenced for financial literacy education, and for organisations like MABS.

-Rd
 
Tax on debt? How do you think the banks make all their money?! (interest, penalties on interest, penalties on penalties on interest...) I don't think this sort of psychology would reduce debt but would actually increase it.

I would agree that less tax on savings is a good idea. It would encourage savings and might actually discourage some of the more hare-brained investment schemes around (including some overseas property transactions IMHO) by making it worthwhile to save. At the moment, the returns on savings are so poor after DIRT that people have no incentive and are attracted to a range of dodgy products in the hope of getting some sort of return.
 
I don't think this sort of psychology would reduce debt but would actually increase it.
Click to expand...

Possibly, but if you have to tax something, it might as well be something bad (excessive debt) rather than something good (saving).

E.g. the Credit Card levy could have been applied to the people with multiple cards (no tax on your first card), or perhaps a levy on the interest charged on debt, so people who don't pay their credit card each month would pay more tax than people who do.

-Rd
 
> Possibly, but if you have to tax something, it might as well be something bad (excessive debt) rather than something good (saving).

But surely, from a macro-economic point of view, there is nothing intrinsically "good" or "bad" about either debt or saving? Looking at the big picture debt can be just as good or bad as savings depending on your viewpoint, the prevailing economic climate and a host of other variables...?
 
True, depending on the climate we need both in moderation.
However, (I'm open to correction on this), at the moment there's apparently a big savings gap, and a growing problem with consumer debt.

We also have a problem with extremely high prices, so perhaps clocking back on consumer spending wouldn't be a bad idea.

I'm not an expert, but it seesm to me we should be trying to tip the scales back towards savings, and away from consumer debt.

Not saying we should all become puritans though.
If that's what you're worried about. ;)

-Rd
 
I see that the [broken link removed] has an APR calculator link but it seems to be restricted to CU staff only. :(
 
A while back I wrote a calculator for this purpose which uses the formula from the 1995 Consumer Credit Act. I've dug it out and put it up on a web page but I haven't tested it with various browsers etc. You may need to install the latest version of Java for it to work... I dunno. The page describes the calculator and give instructions etc.
 
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