# 2 credit union loans - €16,000 in shares - how to minimise the cost?



## Tinney78

Hi all. First post so thanks in advance for any advice offered. Our situation is as follows. I have a credit union loan of approx 19000 outstanding to which I repay 500 per month. I have 9000 in shares. My wife(of 3 weeks) has in a different credit union a loan of 14000 outstanding with 7000 in shares. We also have 10000 in savings in the bank(wedding gifts). Basically what we are trying to do is reduce our monthly outgoings as with these loan repayments an a mortgage there is not a lot left. What is our best options with this matter as we don't know what steps to take next. Thanks in advance once more


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## Crugers

*2 credit union loans an confused*

So, between the two of you, you have:
Loans 33000
CU Shares 16000
Bank Savings 10000
Current outgoings - repayments on loans of 500+???
And you want to reduce the current monthly outgoings

You could go to the CU's and request that the current loan(s) balance be refinanced at lower repayments over a longer term. That will mean you will pay more over the longer time/term but it can reduce your current outgoings. It will probably affect your standing in the CU to some extent - remember you(both) did go and sign agreements and now you want to change these contracts. How much effect will it have - that depends on the CU, the CU policy and a heap of other variables...

You can take your bank savings and put them off the loan(s). That would reduce your current outgoings slightly, in that the interest you pay per month would be less because the outstanding principal is less. It would also have the longer term effect of getting the loan cleared sooner.

You could approach the CU and request that some/all of your shares be withdrawn and paid off the loan balance. Taking some of the share balance off the loan balance will have the same effect as above - slightly less repaid each month due to a reduction in interest due! Taking ALL you share balance off your loan will maximise the current reduction and maximise the shortening of the term but it is a bit of a nuclear option in that your "credit rating" in the CU is shot to pieces... You are back at square 1 and would need to start again... 

Or you could combine any or all of the above...
Either way you either pay for longer or deplete your current "savings"...

HTH


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## Brendan Burgess

Crugers said:


> You can take your bank savings and put them off the loan(s). That would reduce your current outgoings _*slightly*_,...
> 
> Taking some of the share balance off the loan balance will have the same effect as above - _*slightly *_less repaid each month due to a reduction in interest due!



I don't think that there is anything "slightly" about this. 

Your current position is something like this



||Interest rate|interest|
Loans |33000|9%|-3,000
CU Shares| 16000|1%|160
Bank Savings|10000|2%|200
net borrowing|7,000||2,640
Net APR||38%|...


|net |loan|shares
You|10,000|19,000|9,000
Wife|7.000|14,000|7,000Step 1 - Check out this thread to understand the wonderful world of how Credit Unions treat their members
Step 2-  Check out the intererst rate each credit union is charging you on your loan and paying you on your shares
Step 3 -Check out their policies 
Step 4 - If a Credit Union charges interest on the net amount, then leave it for the moment.
Step 5 - Assuming that neither does that, then reduce the loan outstanding by as much as possible by setting the shares against this. 
Warning: You may meet resistance from the CU to doing this. They want you to borrow money at 9% to place it on deposit at 1%. This is in their interest, but not yours. 
Step 6 As an absolute minimum, request that your shares be paid off your loan so as to reduce the loan to 4 times the shares

If they set €5,500 of your shares against your loan, this would reduce it to 



loan|13,500
Shares|3,500
Net loan|10,000
shares/loan|26%They could set your entire shares in full to reduce your loan to €10,000 but probably won't. Ask them anyway.
Step 7 - Ask if you pay off your loan in full, will they give you a fresh loan of €7,000 without any shares. 
Step 8 - If they agree, then pay off your wife's loan with the fresh loan. 

Your net position will be a loan of €7,000 from your credit union on which you will be paying 9% interest. 
At repayments of €500 a month, this would be cleared in around 14 months and you would be debt free.

Net result:  You + €2,640 per year ; Credit Union - €2,640 per year

I think that this is worth aiming for.


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## Crugers

*2 credit union loans an confused*



Brendan Burgess said:


> I don't think that there is anything "slightly" about this.



If the OP has signed/agreed to repay total €500 per month (principal+Interest), then there will be *no* reduction in current outgoings... OP will just continue repaying total €500 per month... The term will be shorter of course.

If member has opted to repay a set amount off principal per month + whatever is due in interest, then the only change will be the reduced amount of interest due. That would work out at between €5 and €10 per €1k reduction in the principal. Reduce the loan(s) principal by the €10k bank savings and it could be anywhere from €50 to €100 per month depending on the interest rate..
So yes it is more than "slightly" reduced...



What's *Net* APR?


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## Brendan Burgess

Hi Crugers

As my reply was a long reply, I posted it in stages. 

It might be a lot clearer now that it is finished.


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## Brendan Burgess

Crugers said:


> What's *Net* APR?



It's a concept which the Credit Unions don't like discussing. it is best illustrated by  way of example



||APR|interest
Loan|10,000|10%|1,000
Shares|9,000|1%|90
Net loan|1,000||€910
In this case the customer is paying €910 per year for net borrowings of €1,000.

That is a net APR of 91%. 

If any financial institution other than a Credit Union was doing it, there would be a law against it.


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## Crugers

I had a mortgage with AIB 6 figure sum 4%
I also had a cash save account with AIB interest @ .001%

So others are at it as well!


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## Brendan Burgess

Hi Crugers

I am disappointed that someone as tuned in as you would be in such a situation. 

The Consumer Credit Act (?) prevents AIB from charging you any penalty for reducing your mortgage with the cash. 

By paying down your mortgage, you would have saved 4% a year.  If it was €1,000 then it was costing you €40 a year. Probably not too bad. 


Paying off a Credit Union loan will save a person around 9% a year.

The CU Act, The League's policies, and the policies of most credit unions do not allow people/ dicourage people from paying off expensive loans with shares which earn very little. 

Brendan


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## Slim

Brendan Burgess said:


> It's a concept which the Credit Unions don't like discussing. it is best illustrated by way of example
> 
> 
> 
> ||APR|interest
> Loan|10,000|10%|1,000
> Shares|9,000|1%|90
> Net loan|1,000||€910
> In this case the customer is paying €910 per year for net borrowings of €1,000.
> 
> That is a net APR of 91%.
> 
> If any financial institution other than a Credit Union was doing it, there would be a law against it.


 
It is the law (Credit Union Act 1997) that dictates that a borrower maintain no less than 25% of the loan in shares(savings). No CU would enforce a 91% level though they will not discourage it. Many will offer a reduced rate of interest on the loan if it is matched 100% by shares. The logic for this is that people like to have savings as well as a loan as their loan would be paid off if they die and their savings may well be doubled.


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## demoivre

Slim said:


> It is the law (Credit Union Act 1997) that dictates that a borrower maintain no less than 25% of the loan in shares(savings).



That applies if the borrower wants to *withdraw* some of his shares while he has a loan. However a borrower can offset all his shares against his loan as per Section 32(5) of the Credit Union Act.


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## demoivre

Brendan Burgess said:


> The CU Act, The League's policies, and the policies of most credit unions *do not allow people*/ dicourage people from paying off expensive loans with shares which earn very little.
> 
> Brendan



I don't get this Brendan. Credit unions are either bound by the Credit Union Act including Section 32(5), as linked to above, or they aren't.


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## ontour

At the end of it you should have one loan with some shares in that account and a 'rainy day' fund.  One option would be to choose the account with the lower interest rate, reduce the loan to 12k, leave 3k in shares in that account.  That would allow you to clear the other loan and have 2k for a rainy day fund.  That may be left in the credit union to borrow against in the future or put in a bank account that has a guaranteed and higher interest rate.

There may be other routes that would reduce your cost of borrowing further, such as a mortgage top-up.  The advantage of the above is that it should be easy to do in one trip to the credit union.


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## Slim

demoivre said:


> That applies if the borrower wants to *withdraw* some of his shares while he has a loan. However a borrower can offset all his shares against his loan as per Section 32(5) of the Credit Union Act.


 
Section 32(5) seems to provide for set off at the instigation of the credit union, with the consent of the member. Many CUs would not favour this as it diminishes the security they have for the loan and consequently, raises the provision they may have to make in case of default. On write off, the set off happens with or without consent.


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## Complainer

Slim said:


> Section 32(5) seems to provide for set off at the instigation of the credit union, with the consent of the member. Many CUs would not favour this as it diminishes the security they have for the loan and consequently, raises the provision they may have to make in case of default.


Is this an accounting issue or what? The net position of the CU doesn't change when the borrower sets off their shares against a loan. If I have a €10k loan and €4k savings, then the net position is €6k. If I have a €6k loan and zero savings, then the net position is €6k. The risk to the CU is the same either way, so it doesn't really diminish the security. Or am I missing something?


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## ontour

Complainer said:


> Or am I missing something?



The credit union is paying between 0-3% dividend on the shares and charging between 4-11% on the loan.  If the loan is over a couple of years that would be in the order of €200 of lost earnings to the credit union.

From the accounting perspective in credit unions the ratios look bad if there is no shares  but looks better when there is 4k in share.  At the end of the day the exposure is still the same.

Lastly for the credit union if the borrower falls behind on payments, they can dip in to those shares, catch up on the repayments and still have a 'performing' loan.


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## Crugers

ontour said:


> ...Lastly for the credit union if the borrower falls behind on payments, they can dip in to those shares, catch up on the repayments and still have a 'performing' loan...


The ILCU wouldn't call it a performing loan! (either with or without quotes!)

Res 24 AGM 2002 says "_...For the purposes of this resolution, a transfer of shares, leaving the same net indebtedness to the credit union after such transfer has been made shall not constitute a payment on principal..._"



IMHO I'd say some of the reluctance to apply all savings against indebtedness is that they, CU's, are keeping their options open to "dip in" with "costs" if and when they eventually come round to the fact that the debt IS bad and must be written off!


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## Slim

Crugers said:


> The ILCU wouldn't call it a performing loan! (either with or without quotes!)
> 
> Res 24 AGM 2002 says "_...For the purposes of this resolution, a transfer of shares, leaving the same net indebtedness to the credit union after such transfer has been made shall not constitute a payment on principal..._"
> 
> 
> 
> IMHO I'd say some of the reluctance to apply all savings against indebtedness is that they, CU's, are keeping their options open to "dip in" with "costs" if and when they eventually come round to the fact that the debt IS bad and must be written off!


 
Not so. There are no costs at written off stage and the court actions usually follow 'write off' so there is usually no funds to offset costs.


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## Complainer

ontour said:


> From the accounting perspective in credit unions the ratios look bad if there is no shares  but looks better when there is 4k in share.  At the end of the day the exposure is still the same.


Sounds like the ratios are measuring the wrong things so.


Crugers said:


> The ILCU wouldn't call it a performing loan! (either with or without quotes!)
> 
> Res 24 AGM 2002 says "_...For the purposes of this resolution, a transfer of shares, leaving the same net indebtedness to the credit union after such transfer has been made shall not constitute a payment on principal..._"


I'm a bit lost at this. If a transfer of shares against a loan is not a repayment of the principal, then what is it?


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## Crugers

Complainer said:


> ...I'm a bit lost at this. If a transfer of shares against a loan is not a repayment of the principal, then what is it?...



In fact it is a repayment of principal!
But...
Res 24 AGM 2002 says "_...For the purposes of this resolution... _It is not 

_Resolution No. 24 of Annual General Meeting 2002 provides as follows:
"A loan, other than a single payment loan, on which no due payment on foot of principal has been received during the 12 month period immediately preceding the year end account date, shall be deemed to be a bad debt. Loans upon which the credit union has collateral, by way of a solicitor’s undertaking to discharge the loan, shall be excluded from this provision.
After utilising any existing reserves or provisions set aside for that purpose, all such bad debts must be written off against income at year end accounting.
A single payment loan shall be deemed to be a bad debt and treated as indicated in the preceding paragraph when such loan has not been liquidated within a period of three months after due date, unless an extension has been negotiated.
For the purposes of this resolution, a transfer of shares, leaving the same net indebtedness to the credit union after such transfer has been made shall not constitute a payment on principal."_


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## Slim

Crugers said:


> In fact it is a repayment of principal!
> But...
> _For the purposes of this resolution, a transfer of shares, leaving the same net indebtedness to the credit union after such transfer has been made shall not constitute a payment on principal."_


 
This means that a CU cannot avoid providing for a bad debt by using shares to reduce the loan in a write off. 

There is a belief amongst CU practitioners that if a member owes€12,000 and has €6,000 in shares, they will try to pay off the €12,000 so they can access their €6,000. They, the member, also avoid all the unpleasantness of bad debts etc. If the CU allow the €6,000 to be set off against the loan, they fear the member may walk away from the balance.


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