# Key Post: Should I borrow from the Credit Union or the bank



## Brendan Burgess (7 Jun 2004)

Credit Unions fulfil an important function in society:

They lend money to people whom the banks won’t lend to. 

They usually offer very good rates for money on deposit or in shares. 

They encourage people to save which is a good thing, most of the time.

So… do they offer borrowers good value?

Each Credit Union is different – some may be good value, but many are more expensive than the banks. 

It is very easy to calculate whether a bank is good value or not. By law, they must quote the true rate of interest which is known as the APR. If the APR in Bank of Ireland is 8% whereas the APR in AIB is 10%, then Bank of Ireland is lower and therefore better value. 

The Credit Unions are not obliged to quote the true rate of interest on their loans. But worse still, where they oblige you to keep money on deposit while borrowing money, they don’t bring this into the calculations.

Let’s say that you have €3,000 in the Credit Union and you want to buy a car for €13,000. 

A bank will simply lend you €10,000 which you add to your €3,000 and you can drive off in your car. If the rate of interest is 10%, the cost of €10,000 for a year will be €1,000. 

Some Credit Unions will allow you withdraw the €3,000 and lend you the €10,000. If they do this it’s easy to compare. If their rate is higher than 10%, they are more expensive. Credit Unions also provide some insurance on loans if you die, but this is relatively cheap and should really be omitted from the calculations. If there was no other difference, then you might as well have the free insurance. Some banks will have gimmicks such as paying your road tax for the first year. 

If the Credit Union insists that you leave the €3,000 in shares and borrow the full €13,000, then the Credit Union will work out much dearer than the quoted rate. You still borrow a net figure of €10,000 but you pay interest on €3,000.  So you are effectively borrowing €3,000 at 10% to put it on deposit at around 2%. So the Credit Union loan will cost you €240 a year more than the bank ( €3000 @ 8%[10% -2%]) 

Credit Unions justify this requirement in saying that it promotes the savings habit. I don’t think that it makes any sense to borrow money at 10% to invest it at 2%. 

*If you are borrowing from a Credit Union*
There is no longer a legal requirement to maintain shares while you borrow, but your local Credit Union may insist on it. If they do, you should argue your case against it. If they refuse, then borrow elsewhere. But keep a small amount of money in the Credit Union so that you remain a member. Go to the AGM and complain about this outdated practice.


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## Sophie (22 Jul 2004)

*Legal requirement*

Hi,

Can you advise what authority governs the practices of Credit Unions in Ireland as I would like to read the law which states that there is no longer a legal requirement to maintain shares while you borrow.

Thank you


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## Guest (23 Jul 2004)

*Legal requirement*

As far as I know IFSRA regulates CUs:

[broken link removed]


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## Guest (23 Jul 2004)

*>> Should I borrow from the Credit Union or the bank*

This link might also be of interest:

[broken link removed]

Note also this link:

[broken link removed]



> The system of credit union regulation in the Republic, which began with the Credit Union Act 1966 under the aegis of the Registry of Friendly Societies, ceased on April 1st 2003. Regulation by the Registrar of Credit Unions, under the Central Bank and Irish Financial Services Regulatory Authority, came into force on that date.



This seems to be the letter of the law assuming that it has not been superceded or amended since:

[broken link removed]


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## jod (30 May 2005)

*Re: >> Should I borrow from the Credit Union or the bank*

Does anyone know roughly what deposit rates credit unions pay at the moment on their dividend accounts? Are they better than Northern Rock or RaboDirect. No rates are quoted on their websites.


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## RainyDay (30 May 2005)

*Re: >> Should I borrow from the Credit Union or the bank*

Hi Jod - First of all, each credit union makes their own decision about their rates. There is no national rate for CU's. Also, CU's set their rates in arrears, so around Nov/Dec this year, they will set the rate paid on deposits for the year. They should be able to tell you the rates paid over recent years, which will give you a rough idea (but not a guarantee) of what to expect.


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