# Secured Loan rate v. Standard Loan rate



## HelenQ

Can I just ask what is meant by a Secured Loan Rate with the Credit Union as I note from my local credit union that the rate is 5.5% as opposed to 10.5% at the standard loan rate. 

I need to do some renovations to our family home and would like to borrow a substantial amount.  I do have an excellent track record with my local credit union in that any loans I have taken out have been paid back well within the time given.  I have always lodged more than the required weekly repayment as well as adding to my savings and am in part time employment (I am my husband's carer).  The renovations are not to do with my DH's disability but that there are serious issues in the kitchen that need to be addressed.  

So can I get a Secured Loan Rate - would my home be used as collateral and if (in the unlikely event) that I would default can the C.U. lodge a judgement against the family home.


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## Crugers

At a guess I'd say the "Secured Loan Rate" is for a loan less than or equal to your share/savings balance i.e. you are borrowing your own money and there is no exposure to loss for the CU.


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## ladylu

Can anyone explain why anyone would borrow from the credit union using their secured rate. As far as i can see it only applies where you borrow less than your savings. Why would you bother to do that. You give them 10,000 to look after for you and you then borrow 5,000 of your own money and pay them 5.5% for the privilage. Why not just spend your own 5000 and save paying the 5.5% interest


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## wbbs

Secured rate refers to any secured loan, it can be secured against several things, not necessarily your savings.


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## Slim

wbbs said:


> Secured rate refers to any secured loan, it can be secured against several things, not necessarily your savings.


 
Nah, in a credit union context the term 'secured loan' when associated with a lower interest rate, refers to a loan that is less than savings. A loan greater than savings, even if secured by a property, will be charged at the higher rate. It is, of course, a 'secured' loan but is charged at a higher rate.

_Can anyone explain why anyone would borrow from the credit union using their secured rate. As far as i can see it only applies where you borrow less than your savings. Why would you bother to do that. You give them 10,000 to look after for you and you then borrow 5,000 of your own money and pay them 5.5% for the privilage. Why not just spend your own 5000 and save paying the 5.5% interest?_

Indeed, the only rationale would be the insurance of loan and savings, i.e if the borrower dies, then the loan is cleared (usually, some people may require a health declaration first and may be refused insurance) plus savings can be increased on death, max would be doubled, depending on age of saving etc and an overall limit, about €13,500 (this may be variable depending on the CU's insurance policy). Also, many people feel that, for small loans, it is easier to keep savings and pay back a loan, rather than eliminate savings and then discipline themselves to save it up again.

Slim


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## wbbs

Interesting, must double check my sources.


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## Brendan Burgess

ladylu said:


> Can anyone explain why anyone would borrow from the credit union using their secured rate. As far as i can see it only applies where you borrow less than your savings. Why would you bother to do that. You give them 10,000 to look after for you and you then borrow 5,000 of your own money and pay them 5.5% for the privilage. Why not just spend your own 5000 and save paying the 5.5% interest



It's absolute madness and the life insurance issue doesn't justify it. 

Imagine the war that would break out if AIB or Bank of Ireland offered such "deposit backed loans". The Central Bank would reprimand them for not acting in the best interests of the cusomer.


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## CU Manager

Brendan Burgess said:


> It's absolute madness and the life insurance issue doesn't justify it.
> 
> Imagine the war that would break out if AIB or Bank of Ireland offered such "deposit backed loans". The Central Bank would reprimand them for not acting in the best interests of the cusomer.


Thats a ridiculous statement to make. Nobody is forcing a member to take a secured loan - would you prefer a member to have to pay the full rate if they prefer to keep their savings intact as many of our members choose to do? Emotive descriptions like "absolute madness" should have no place in commentary on a serious financial website.
Every day customers take out loans with AIB and BOi and I'm sure they have savings which they CANNOT use as collateral to reduce teh cost of their borrowing. I am very disappointed in your post!


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## Brendan Burgess

Hi CU Manager



> if they prefer to keep their savings intact as many of our members choose to do?


 
Is it not your duty as a CU Manager, to advise them that this is not in their financial interests? It makes no financial sense to borrow at 5.5% while getting 1% on their savings. 

If, as you say, customers are taking out loans with AIB and BoI every day, while they have savings, this is absolute madness too.  If AIB or BoI introduced a product to promote this, I think that the Central Bank would step in. 

Brendan


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## Crugers

Brendan Burgess said:


> ...It makes no financial sense to borrow at 5.5% while getting 1% on their savings...



Taking this statement to the extreme - nobody with a mortgage should ever save unless they receive a higher rate on deposit than they pay on their mortgage?


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## Brendan Burgess

Hi Crugers

Someone  with €100,000 on deposit certainly should not borrow €100,000 on a mortgage to buy a house. 

Someone with a mortgage of €100,000 @ 5.5% ( a very expensive mortgage) might consider building up an emergency fund of €5,000.  But people tend to overdo emergency funds and if the loan is as expensive as 5.5%, they should prepay their mortgage as a priority. 

Is there ever a case for someone with €10,000 in the CU at 1%, borrowing €10,000 @ 5.5% say to buy a car?  I really can't see why they would do this.

They should buy the car for €10,000 and use the repayments they would have made to rebuild their emergency fund.  But they are probably a member of the CU in good standing, so they can probably access a loan anyway if there is an emergency. 

I know some credit unions encourage their members to withdraw their savings instead of borrowing and I know that some members don't like doing it.  But the CUs should act in the best interest of their members and explain the costs of this.


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## Crugers

Brendan Burgess said:


> ...It's absolute madness and the life insurance issue doesn't justify it....


I know of an individual who immediately before going for major surgery took out a substantial loan and lodged it into their shares.
Granted, once they had recovered they used their shares to replay the loan.


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## Brendan Burgess

And would the life insurance have covered it?  Certainly a normal life policy would be expensive or void. 

Fine, if playing the system like this works, maybe do it. But is that not playing the system against other credit union members? 

Brendan


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## CU Manager

Brendan Burgess said:


> And would the life insurance have covered it? Certainly a normal life policy would be expensive or void.
> 
> Fine, if playing the system like this works, maybe do it. But is that not playing the system against other credit union members?
> 
> Brendan


We do not have a legal duty as we are not subject to the Consumer Protection Code (I have no problem with pointing out to a member that it would cost them less to use their own money). We are legally obliged to highlight the cost of the contract prior to the member entering it so we are fully transparent.
There are many people who are better motivated to pay off a debt rather than build up depleted savings and therefore choose a secured loan as it suits their needs.
I think that your simplistic "whats in the best interest of the customer" ignores the realities of life for many people.
Your comparison with a mortgage holder who has savings in a different post on this thread again ignores real life issues in todays economy. I have substantial savings and I have a mortgage (taken out recently so not a tracker). My net indebtedness is zero but I choose to hold onto my cash so as to enable me to purchase other property if the right opportunity presents itself - there is no chance that I will pay off my mortgage and then sit on my hands when a distressed property presents itself - I would not put myself at the mercy of the banks to enable me to take out a new mortgage in a timely fashion - cash is king right now!

CU Manager


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## CU Manager

Brendan Burgess said:


> And would the life insurance have covered it? Certainly a normal life policy would be expensive or void.
> 
> Fine, if playing the system like this works, maybe do it. But is that not playing the system against other credit union members?
> 
> Brendan


Well one minute you're lambasting credit unions for being anti member, now you're suggesting the member would be acting anti credit union. Go figure!


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## CU Manager

Just did a quick trawl of our within shares loans issued over the last 6 months.
Some observations:
*All except 3 of the borrowers were over 55 (one of the free life insurance thresholds)
*Average loan size €3,000
*Many borrowers cited the loan purpose was to borrow on behalf of a son/daughter to enable them to pay a lower rate of interest whilst maintaining their (the parent's) savings in tact

The other feature of our within shares loans is that borrowers on the standard rate loan can refinance their loan to the within shares rate once the loan is paid down to the savings amount. We also allow, without exception, the member to pay off their remaining loan with their savings - approx 20% of borrowers choose this option. Unfortunately, within months, many are back seeking new credit and this is a negative factor in loan approval (mainly if affordability is marginal to begin with)


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## Brendan Burgess

CU Manager said:


> We do not have a legal duty as we are not subject to the Consumer Protection Code (I have no problem with pointing out to a member that it would cost them less to use their own money). We are legally obliged to highlight the cost of the contract prior to the member entering it so we are fully transparent.


 

I don't get this. The Credit Union is a mutual. It should be acting in the best interests of  its members. It should not be about whether there is a legal obligation on them or not. 




> Your comparison with a mortgage holder who has savings in a different  post on this thread again ignores real life issues in todays economy. I  have substantial savings and I have a mortgage (taken out recently so  not a tracker). My net indebtedness is zero but I choose to hold onto my  cash so as to enable me to purchase other property if the right  opportunity presents itself



Crugers brought up the mortgage issue. It is not really equivalent. 

As an active property investor, I can see what you are doing makes sense. 

But it makes no sense in the CU environment. If they are good enough to get a loan today, they can get a loan when they need it in a few months' time.  If they are about to buy something next week, then it might make sense to get the loan now just to be sure.


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## Brendan Burgess

CU Manager said:


> Well one minute you're lambasting credit unions for being anti member, now you're suggesting the member would be acting anti credit union. Go figure!



I don't understand your point.  I am not saying that they are anti-member, it's just that they are not acting in their members' best interests.

The Credit Union is a union of members, acting cooperatively. It should not be customers vs. lender.   If the CU manager knew about this big operation, he should not have given out the loan. It seems to me that the customer was playing the system and could have cost his fellow members dearly.


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## Brendan Burgess

> Just did a quick trawl of our within shares loans issued over the last 6 months.



Very interesting data. I presume a "within shares" loan is what we have been calling a secured loan? 

I don't like this borrowing on behalf of a child, but I can see that it might appeal to some people.  If the parent is prepared to take the liability, he should simply lend the money directly to the child. However, I see that the child might take a credit union loan statement in their parent's name as belonging to them and they might feel more obliged to pay it off rather than pay off a personal loan. 

By doing it this way, the child is paying 5.5% instead of, say, 10.5% if they borrowed directly. But they could save a further 5.5% if the parent just lent it directly to the child.


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## Brendan Burgess

> borrowers on the standard rate loan can refinance their loan to the  within shares rate once the loan is paid down to the savings amount.


This is much worse than I thought. 

Are you saying that someone who has a loan of €5,000 and shares of €4,000 is paying 10% (not sure what your standard rate is?) on the loan and getting 1% on the shares?

How common is this?


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## CU Manager

Brendan Burgess said:


> This is much worse than I thought.


Worse than what? - Not sure what you're getting at there (can you expand a little?)



Brendan Burgess said:


> Are you saying that someone who has a loan of €5,000 and shares of €4,000 is paying 10% (not sure what your standard rate is?) on the loan and getting 1% on the shares?


Our standard rate is now 12%. Within shares = secured loan = 5% and yes, someone in the scenario you outline would be paying 12% on €5,000 and receiving 1% approx in dividend on the savings of €4,000. This has been the CU business model for 50 years!



Brendan Burgess said:


> How common is this?


Most performing loans will start off as a multiple of the savings collateral and then trend down towards the savings amount over several years. Most traditional CU loans are over 3-5 years but the overall loanbook would rollover every 3 years approx. Slightly more tan 33% of the entire loanbook will have savings attached to it. Simple maths - loanbook of €30M will have approx €10M savings collateral against it.


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## CU Manager

Brendan Burgess said:


> I don't understand your point.  I am not saying that they are anti-member, it's just that they are not acting in their members' best interests.


 ???? Crossed wires here I think



Brendan Burgess said:


> The Credit Union is a union of members, acting cooperatively. It should not be customers vs. lender.   If the CU manager knew about this big operation, he should not have given out the loan. It seems to me that the customer was playing the system and could have cost his fellow members dearly.


Except that the insurance is not self insurance - its provided by an insurance company called ECCU owned and operated by the Irish League of Credit Unions


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## Brendan Burgess

Hi CU Manager

I am just shocked at how widespread this practice seems to be. I can sort of understand why you might be prepared to get 2% on your savings while you have a mortgage at 5.5% so that you can keep money available for a great property bargain. I don't like, but I can understand why a father might borrow on behalf of his son. 

But my example is paying €600 interest on his €5,000 loan and earning €40 on his shares. So on net borrowing of €1,000, he is paying €540 interest per annum. 

54% net APR? I am speechless.


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## CU Manager

Brendan Burgess said:


> I don't get this. The Credit Union is a mutual. It should be acting in the best interests of  its members. It should not be about whether there is a legal obligation on them or not.


I simply outlined the legal position and qualified it by saying that I have no problem informing a member that its cheaper for them to use their own funds. I further pointed out that pre-contractual information is also provided to the member prior to drawing down the loan outlining the full cost of credit and allowing them to withdraw from the contact without penalty.
You seem to have a conceptual problem with the fact that many people prefer to borrow rather than deplete existing savings. This costs them money in the form of the interest charged - this is explained and yet members choose to borrow anyways for a variety of reasons, some of which I have already outlined earlier.
Its a simple fact that this is a product that members want (especially older members). You have commented, rather emotively, calling such borrowing "absolute madness". I joined this discussion because I take exception to this description, coming as it does, from someone with your public profile.


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## CU Manager

Brendan Burgess said:


> 54% net APR? I am speechless.


There is no such term as Net APR - no legal definition in any case. We do not require a set amount of savings against a loan apart from a minimum of €10 savings (our own policy) so members have a choice on how much collateral to offer prior to taking out a loan.
Many build up savings to "prove" their ability to manage their finances and live without a set sum every week/month etc and prove their ability to service a loan repayment especially where conventional proof of income is not available.
I have regularly given loans of €10K with savings of just €100 where the member can demonstrate ability to repay. On the other hand I would regularly recommend to certain members to build up a savings pattern where they cannot prove ability to repay in conventional ways (payslips, set of accounts etc).
I am glad that this discussion just requires keystrokes so your expression of speechlessness need not inhibit further typed commentary!


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## Bronte

Brendan Burgess said:


> I don't like this borrowing on behalf of a child, but I can see that it might appeal to some people. If the parent is prepared to take the liability, he should simply lend the money directly to the child. However, I see that the child might take a credit union loan statement in their parent's name as belonging to them and they might feel more obliged to pay it off rather than pay off a personal loan.
> 
> .


 
I think you're trying to equal a credit union to a bank. The whole ethos of the credit union is about being a collective group who help people who otherwise would not get loans. They are friendly and approachable, if you get into difficulty they are quick to set you on the right road. It's not for financially astute people in general. (as in why would you borrow if you have savings) Part of the ethos is that you must learn to save, many people have problems with this. Logically of course it's better to save and then use that money to spend rather than borrowing, but that's to misunderstand the reality of lives for many people. If they get into good habits of saving with the credit union they wills stay away from money lenders or the likes of GE money and the new absolutely awful thing pay day loans (which should be banned in my personal opinion) This is why the way credit unions do business is good for society. Banks don't want to know.

Part of their culture when you have a loan is that you pay it back but that you also save. People have never been taught to do that. And with the celtic tiger all they learnt was to borrow and never pay back. To get your first loan you must save for a while with them first. 

Specifically in relation to a loan that a parent gets out for a child, I know many cases. It can be so the child buys a moped to go to a job, it can be so the child repays a credit card debt that is crippling them, it could be to start a business. In each case the child would be unable to borrow and or has gotton into difficulty. In order to ensure Johnny gets back on track, mum or dad try and help with an easily accessible loan from the credit union. Generally the child pays back the amount and interest. It then instils in that child good habits of paying back loans. I have nothing but praise for credit unions. And if I could bank with them I would. Both me and Mr.Bronte have been a member of a credit union forever as are all my family. 

The only bad word I've to say on credit unions is that some of them went beserk during the boom too and lent out fantastic sums in areas where they should not have been lending.


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## ClubMan

Bronte said:


> The whole ethos of the credit union is about being a collective group who help people who otherwise would not get loans. They are friendly and approachable, if you get into difficulty they are quick to set you on the right road.


This is not always true but I'm sure that anecdotal reports to the contrary (such as that of a friend of mine posted elsewhere) will be dismissed by some as "bad luck" or unrepresentative or indicative of some sort of anti-_CU_ crusade.

My friend had to battle with their _CU _for months in order to, eventually, get them to deign to allow for the offsetting of shares against the outstanding loan balance but still insisting on the retention of a share balance representing 25% of the outstanding loan balance. All provisional and subject to the approval of the board of management of course. In spite of the fact that this (or better still the offsetting of all shares against the outstanding loan balance) is clearly in the best financial interests of the individual given the overall situation (as explained elsewhere).

I agree with _Brendan_ - if regular banks engaged in some of the practices carried out by the _CU _there would be uproar. But it seems that for some taking a critical view of _CU _practices is akin to one of our last remaining taboos here in _Ireland_...


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