# Key Post: Loan - Credit Union vs. Bank



## Coyote (27 Aug 2004)

Hi, hope this isn't too daft a question but just wanted to double check ...

We're looking for a €7k loan over 4 years for home improvements.  All my banking (incl. Mortgages) is with PTSB.  The best personal loan rate they have is 9.8% APR VARIABLE for 4 years and won't negotiate on that (I've asked).  My credit union have a 8.9% APR FIXED rate for 4 years, I'm presuming the credit union is the one to go for?  Are there any disadvantages to borrowing from them as opposed to my bank?

Thanks.


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## rainyday (27 Aug 2004)

*Re: Loan - Credit Union vs. Bank*

Will your CU require you to keep funds on deposit with them?


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## Coyote (27 Aug 2004)

*Funds on deposit*

No, at least they've never asked me to do that before anytime I've borrowed from them.  I have €3k savings with them but would hate to go near it (psychological thing).  They look for you to put min. €2 a week into your shares that's all.  I was planning on keeping up my monthly savings contribution (presently €100, plan to reduce to €80) and still pay the loan repayments back.


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## Coyote (27 Aug 2004)

*Rates on their website*

Dividend 2003 - 3.5% 
Deposit Interest - 0.25% on demand 
SSIA Interest - 1.75% 
Standard Loan - 8.9% 
Car Loan (Max 3 Years) - 6.5%
Millenium Account - 2.75% (30 day withdrawal notice)


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## rainyday (27 Aug 2004)

*Re: Rates on their website*



> I have €3k savings with them but would hate to go near it (psychological thing


I can understand that some people have this psychological need. However, be conscious that they are paying you 3.5% on your savings while charging you 8.9% on your loans. This psychological need is costing you approx 5.4% of 3k (150 per annum).


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## Guest (27 Aug 2004)

*Loan - Credit Union vs. Bank*

These topics might also be of interest in the context of CU versus bank borrowing:


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## OhPinchy (30 Aug 2004)

*...*

Hi Coyote-

Recently went through a similar dilemma as yourself - borrow full amount I needed and leave savings for a rainy day or only borrow Total Needed minus Savings.

In the end I used up my savings and so only borrowed a smaller amount (thanks to AAM pointing out the cons of saving while borrowing). This decision was made after overcoming a psychological need similar to that you currently have. I think that the basis for your current outlook is that you might fear a need for cash arising out of the blue at a time when you have used all your savings and also have a loan. In days gone by your when it was harder to get loans this was more understandable - nowadays theres many many organisations (including many bad deals but lots of good ones aswell) that will give you a loan.

Your worst case scenario is you use up your savings so you can borrow less now, but a later cash crisis leads to you borrowing that additional 3K (provided your credit rating is reasonable you would have no problem getting this loan). This is no worse than what you are proposing: you would still end up borrowing the same amount. However, in your solution you are actually incurring additional costs (as above) in order to keep your savings and convince yourself that you have money to spare.

Paying extra to borrow more now to let you keep your savings so that you don't have to borrow to cope with any future possible crisis (which may not happen) just doesn't make sense to me.


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## daltonr (30 Aug 2004)

*Re: ...*

The CU will not allow you to withdraw that €3000 if you have a loan with them.  They may allow you to take out a portion of it.   So, psychological issues aside, you effectively won't have that €3000 cushion if you borrow from teh CU.

So, your options are.

1. Borrow €7000 from the CU wile leaving €3000 in savings.
Pay interest on €7000, earn a lot less interest on €3000
Probably not be able to withdraw all of your €3000 in an emergency.

2. Borrow €7000 from the Bank while leaving €3000 in CU savings.   Pay slightly more Interest on €7000, while earning
interest on €3000, but you'll be able to get at the €3000 any
time you want.

3. Take the €3000 out of the CU.  Borrow €4000 from the bank.   Only pay interest on €4000.  You won't have access to your €3000 any more, but you will probably be able to top up your PTSB loan if the need arises.

If the need doesn't arise you only have to pay back €4000 +Interest, not €7000 +interest.   You'll have saved up the €3000 again as quickly as if you'd never withdrawn it.

I think option 3 is the way to go.  Option 1 is a definite NO, NO.  Option 2 Is a bad idea.

Keep in mind that you thought the CU wasthe way to go on the basis of a 1% lower APR.   BUT,  you have the option of paying interest on €7000 or €4000.  In this situation a 1% difference in rate is not the important factor.  The amount of borrowing is what's important.

Also keep in mind that the psychological thing you refer to is very common in CU members.  Because the CU instills it in it's members.  I and others have argued that the CU is doing it's members no favours in this regard.

-Rd


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## Coyote (1 Sep 2004)

*Thanks*

Thanks all for your good advice.  I'm making a  compromise with my psychological need and have decided to withdraw €2k from the €3k savings and therefore only need to borrow €5k, over three years as opposed to four, and paying a lot less interest than I would have been going for my original option.


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## Slim (6 Sep 2004)

*Re: Coyote & CU*

Most CUs operate a second type of account where you can park shares that you do not want frozen, ie. if you have 3000 in shares and you borrow 12000, that's 25% on shares. This means that the "free shares" will be nil, and then gradually as you pay off the loan, some more of your shares will be available to you to withdraw each month. To overcome this, as long as they agree, you can move, say, 2000, into the "slash 1" account and continue to withdraw as you need. It's not as complicated as I am making it sound and it is done at the stroke of a key, no paperwork.

Slim 8)


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