# CU is encourage me to borrow instead of spending savings



## RainyDay

The letter received from my CU last week reads;



> I am writing to inform  you of important service improvements and great value for members here at xxxx Credit Union .
> SECURED SAVINGS LOAN
> Don't withdraw your hard-earned shares without looking at all your options!
> It is sound financial practice to build up a rainy-day fund, or to save over time for important purchases. And the promotion of such sensible behaviour is a fundamental principle behind credit unions. There are many good reasons not to simply withdraw your savings when you need the money, but to opt for our SECURED SAVINGS LOAN instead.
> How much will it cost me?
> The special low interest rate of only 6.5% (6.7%APR) is fantastic value, with a Loan of €3,000 having repayments of just €21.23 a week over 3 years and the Total Interest Paid is only €312.41.
> For more information on these loans, simply call in to any of our 4 offices locally, or call us on 01 xxxx  to discuss it with a member of our Lending team. When collecting a loan, please bring current Photographic Identification with you.
> Insurance Benefits
> One of the key advantages is that you maximise your FREE Savings and Loan Insurance benefits by taking a loan rather than withdrawing your shares. This will clear your loan and pay-out up to twice your shares to your next-of-kin in the event of death (subject to qualification) .
> Other Benefi t s
> • Secured Savings Loans can be drawn down on demand* at any of our offices, we can even transfer the funds directly into a bank account for your convenience.
> • The extremely low interest rate of only 6.5% (6.7%APR).
> • Your savings continue to earn an annual Dividend.
> • If you wish to clear the Loan, it can be done at any time from your Shares without incurring any penalties or'extra charges.
> • No transaction fees or hidden charges
> *Subject to normal underwriting Terms & Conditions



The member will be financially worse off if they borrow, rather than just withdrawing their savings, as the interest earned on the deposit is less than the interest paid on the loan. 

Shouldn't the CU be educating their members, instead of exploiting their financial ignorance and calling it 'sound financial practice'?


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## PolkaDot

Similar issue discussed here before:
http://www.askaboutmoney.com/showpost.php?p=1342322&postcount=13

One important point that is omitted above in the text you have quoted.....the CU is encouraging people to keep their savings for a rainy day and take out a secured loan instead. However, should that "rainy day" come along shortly after drawing down a secured loan, you won't actually be able to access your savings because they are secured against the loan (unless the CU allows you switch the loan to unsecured?!).


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## Brendan Burgess

> It is sound financial practice to build up a rainy-day fund



Hi RainyDay - I think that this is the generic use of the term rainy-day and personalised to you. 

This is disgraceful behaviour by the Credit Union involved, but the whole concept of a secured loan is widespread in the CU movement.

As a mutual, they should be encouraging good financial practice by their members. 

If AIB ran a similar campaign, encouraging people to leave money on deposit at a taxable  1% as security for a loan of €3,000 @6.5%, there would be uproar. The Credit Unions can get away with this sort of stuff. 

Some progressive unions actually encourage their members to use their savings rather than taking out expensive loans. And oddly enough, they sometimes have difficulty getting people to do so. Customers sometimes insist on borrowing the money and keeping their savings. 

The insurance argument is a nonsense. The premium on €3,000 of a loan and €6,000 of a deposit would be tiny.  CUs should cut their loan rates and sell this separately to those who want it.


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## Brendan Burgess

Anyone1 said:


> Or maybe the CU should deal with the members personal circumstances and suggest or offer the best thing for them.



It is never in a borrower's interest to leave money on deposit at 1% while paying 6.5% on the loan. If the CU really think that this is important, then they should charge 1% on the loan. 



> In regards to your insurance comment, I meant the loss of insurance to the member(many of whom have no insurance at all) and not the cost to the Credit Union.



That is what I was talking about as well. The borrower can get €3,000 or €6,000 or €9,000 of insurance very cheaply. 

The CU should unbundle the insurance and charge separately for it.


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## MrEarl

Brendan Burgess said:


> ....The CU should unbundle the insurance and charge separately for it.



Interesting the way the Credit Unions must only follow the CPC, in respect of Insurance products and as such, can effectively force members to purchase insurance as part of taking out a loan.... a Bank for example cannot make it a condition that one product or service be acquired, to obtain another product or service, as I have it.

------------------- 
Mr Rainyday,

While I think the loan rate quoted by your Credit Union is quite attractive in comparison to many unsecured rates offered (by Credit Unions or other financial services) I do find myself wondering if I am still as jealous of your Credit Union as I recently thought I was


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## cremeegg

Brendan Burgess said:


> It is never in a borrower's interest to leave money on deposit at 1% while paying 6.5% on the loan.



While this is correct mathematically, there is often more involved.

For many people getting the money together to pay for an unexpected expense is serious worry.

A person in this position who has some money saved, may want to pay for a holiday. If they use their savings for the holiday, and the next day their car dies they are in trouble. 

However if they borrow the money for the holiday then they are still in a position to deal with unexpected expenses. This flexibility will come with a cost but it may be well worth it to some people. A cost of €67 on €1,000 over a year does not seem excessive.

Obviously if the CU loan is secured on the savings, i.e. the savings cannot be withdrawn while the loan is outstanding that is a different situation.

In short;

 -   borrowing wile you have savings may make sense, although it comes with a cost.

 -  CU loans secured against savings are exploiting members naivety


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## Brendan Burgess

Hi Cremeegg

The Credit Union should be teaching its members to manage their money well.

If we follow your argument, then a borrower should not take out a secured loan at all, but they should take out an ordinary credit union loan at 12% - perhaps €120 a year per €1,000 is not too much for the flexibility. 

They should put their deposit elsewhere, so they can access it whenever they want. 

The CU Secured Savings product should be banned by the CU Regulator

Brendan


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## PolkaDot

Brendan Burgess said:


> They should put their deposit elsewhere, so they can access it whenever they want.



If you have your deposits elsewhere e.g. a bank deposit account, it's unlikely that you'll get any loan whatsoever from the CU no??


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## Brendan Burgess

PolkaDot said:


> If you have your deposits elsewhere e.g. a bank deposit account, it's unlikely that you'll get any loan whatsoever from the CU no??



Most banks lend at least 3 times the amount you have in shares. 

So if you have €3,000, put €2,000 into AIB as a RainyDay fund. 

Leave €1,000 and the CU should lend you €3,000.

Just to be clear - I am not recommending this. I think you should use your savings instead of borrowing to buy something. But this would be more flexible than leaving your money in the CU.


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## Time

According to the local CU all loans are secured on the shares. And they charge no where near 6%. 1% per month is the tariff round these parts.


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## RainyDay

cremeegg said:


> -   borrowing wile you have savings may make sense, although it comes with a cost.
> 
> -  CU loans secured against savings are exploiting members naivety


At a minimum, I'd expect a CU to have their members interests at heart, and to be very explicit about the cost of borrowing over the cost of withdrawal of savings.


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## PolkaDot

Time said:


> According to the local CU all loans are secured on the shares. And they charge no where near 6%. 1% per month is the tariff round these parts.



Sorry? 1% interest on loans? That can't be right?


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## Brendan Burgess

Time said:


> According to the local CU all loans are secured on the shares. And they charge no where near 6%. 1% per month is the tariff round these parts.



Hi Time

Are you sure? 

The maximum rate they are allowed charge is 1% a month. 

I understood that few charged this rate. 

Brendan


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## Time

The local one here is deffo charging 1% a month.


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## WizardDr

The whole idea of the Credit Union was to borrow and save at the same time. You can argue all you like but that is the foundation stone. 

Statute wise 12.5% APR (or 1% a month) is the maximum. 
Statute wise there is a right of set off of Shares and Savings against loans. Nothing eartn shattering or new about this.

Most always charged the 1% per month regardless of level of savings and the 'multiple' used to be 3x.

Clearly - some here are not familiar with the structure. Thats not saying it is good or bad - but most of them have survived the tsunami despite the unsecured nature of many of their loans.

Also they do provide savings insurance and loan insurance should you die. This isnt charged directly to your loan but is a charge on the costs of the credit union. Many see it as a difference. There is a legitimate argument that if it were abandoned it would cut the costs of a credit union substantially.

So posters there is a little research to be done when you are using shotguns.


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## RainyDay

WizardDr said:


> The whole idea of the Credit Union was to borrow and save at the same time.



Why?


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## WizardDr

@RainyDay why? Because prior to credit unions a lot of people used money lenders. Even look at the UK and payday lenders have charged up to 4,000% APR.

Money (mis)management is a serious social issue. 

By getting into the habit of saving - you reduce your need to borrow. 

Have a look at the WCCU website.


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## Bronte

cremeegg said:


> While this is correct mathematically, there is often more involved.
> 
> For many people getting the money together to pay for an unexpected expense is serious worry.
> 
> A person in this position who has some money saved, may want to pay for a holiday. If they use their savings for the holiday, and the next day their car dies they are in trouble.


 
Absolutely Cremeegg, there is a lot more involved than maths on this.  It's about a concept and a way of managing money precisely so that people understand it's important to pay off loans but also to save.  It also changes people's habits.  

Rainyday, to get it look at the lovely posts by Janet we had a few days ago.


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## RainyDay

Bronte said:


> Absolutely Cremeegg, there is a lot more involved than maths on this.  It's about a concept and a way of managing money precisely so that people understand it's important to pay off loans but also to save.  It also changes people's habits.


Wouldn't it be better to change people's habits to minimise the interest that they pay, so they are better off in the long term?



WizardDr said:


> @RainyDay why? Because prior to credit unions a lot of people used money lenders. Even look at the UK and payday lenders have charged up to 4,000% APR.
> 
> Money (mis)management is a serious social issue.
> 
> By getting into the habit of saving - you reduce your need to borrow.


Sorry, but you really didn't answer my question. Yes, I fully agree that money management is a serious social issue, and that the action of the payday lenders is dispicable. 

But in this particular scenario, where people have funds on deposit in the CU, aren't the CU stepping into money-lender shoes by encouraging people to borrow more, instead of spending their savings and then saving again? The borrower is out of pocket for the interest margin. The CU would be better off encouraging the members to mind their finances in the long term by minimising interest payments. So if they need funds, they should spend their savings, and then start saving again, instead of making loan repayments again.

The only justification for this approach would be clear data showing that most people are more likely to repay a loan than to save. I'm not so sure that this is the case, and if the CUs are relying on this, they should have good research to justify it.



WizardDr said:


> Have a look at the WCCU website.


Which one - there is a .


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## Brendan Burgess

Hi Wizard 

I think that most people commenting in this thread are familiar with the operation of the Credit Unions. 

I agree fully with Rainyday that the CUs should be encouraging good practice in their members. Good practice does not mean borrowing money at 12% while putting money on deposit at 1%. That is bad practice, and the CUs should be stamping it out. 

Paying off a loan is often the best way of saving and the CUs should educate their members on this. 

The CUs should not force their members to take out deposit "insurance", they should just pay better deposit rates. 

I don't think that they should force them to pay loan insurance either, but I could understand why they might do  that for unsecured loans.  I would prohibit the CUs from imposing compulsory insurance on loans under €10,000, but allow them to impose it on larger loans.


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## WizardDr

The general gist of Credit Unions is found in its name - credit. Its actually about borrowing because if you already had the savings habit - you might not be borrowing.

Offering a loan within savings essentially preserves your savings because you pay back the borrowings.

If your are not a borrower - but like letting some of your money help others thats also part of it.

If you are not in either of these situations - then leave the Credit Union as its nor for you. 

End of.


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## RainyDay

Anyone1 said:


> Credit Unions don't force members to take out insurance, either on deposits or shares. The credit unions insure shares and loans for the members its an operational expense.


The 'operational expense' is an expense to the members. Without this expense, members would get a better return on their savings, or a lower cost on their borrowings.



WizardDr said:


> The general gist of Credit Unions is found in its name - credit. Its actually about borrowing because if you already had the savings habit - you might not be borrowing.


It seems from this that it is in the interest of CU directors and staff to have their members to remain as financially ignorant, and continually borrowing. Any proposal to move members on from borrowing to saving, which would be in the interest of the individual member, would not be in the interest of the CU - have I got that right?



WizardDr said:


> Offering a loan within savings essentially preserves your savings because you pay back the borrowings.


Not true. Your net position with the CU is the actually the same. If you have savings of €3k and a loan of €2k, your net position is still €1k, nothing has been preserved, other than an sleight of hand trick to increase the margin earned by the CU.



WizardDr said:


> If your are not a borrower - but like letting some of your money help others thats also part of it.


Again, you're not helping others by lending them your money. Your net position with the CU is still the same, and that money isn't available to lend to others. The only way that you're 'helping others' is by paying a margin to the CU, so you could be helping the CU, its Directors and its staff all right.



WizardDr said:


> If you are not in either of these situations - then leave the Credit Union as its nor for you.


Sorry, I'm not clear on this. Are you saving there is no place in the CU movement for those who choose to save and spend, rather than those who borrow and spend?


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## Bronte

Brendan Burgess said:


> I agree fully with Rainyday that the CUs should be encouraging good practice in their members. Good practice does not mean borrowing money at 12% while putting money on deposit at 1%. That is bad practice, and the CUs should be stamping it out.
> 
> Paying off a loan is often the best way of saving and the CUs should educate their members on this.
> 
> .


 
While it is financially logical that of course borrowing at 12% when you have savings at 1% makes no sense. But that is to fundamentally misunderstand the people who use a credit union. 

The credit union, any that I've seen are there for it's members. People who otherwise would not get loans from mainstream lenders can go there for loans for cars, holidays, communions, weddings. There's no fuss and bother nor massive form filling and having to send everything to Dublin for a machine to make a decison on refusal. Inevitably the credit union will give you the loan. And sometimes it might be because the credit union committee member might know your uncle, and will therefore take a chance on you.

They have an immensely important role in helping people to both save and borrow, and have helped keep many people away from moneylenders. That can only be seen as a positive. 

When I was first starting out it was the best way to borrow easily. I like they way they operate, but as many know I cannot stand the banks so I might be prejudiced. 

Banks of course would like to see them wiped out. Both Mr. Bronte and I have operated a CU account each for a very long time, and we get derisory interest as all we do is save, but I know that if ever everything fell apart I'd have no problem getting a loan, but more importantly, as they are a force for good in society I would always support what they do. Anyone who has regularly visited the credit union, as I once did, can only observe and see how people need the credit union.

It is true that during the boom some credit unions lost the plot. Hopefully they are getting back on track to what their original core business was.


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## RainyDay

Anyone1 said:


> That's not true. Given that the biggest expense to a credit union in terms of its lending is provisions and bad debts, the insurance cost wouldn't have any affect on the interest charged. Actually it would cost the Credit Union more as it would have to write off loans were a member died.
> 
> As for a savings return, well there's many more things affecting the dividend return than the cost of the insurance. The insurance was always a cost paid as an expense, yet credit unions paid 2-3% historically. Explain why you think the insurance cost is now the cost that's causing a reduced dividend?



*Every* cost incurred by  the CU reduces the dividend to members. You could make an argument about whether the cost of this insurance is material or not, and perhaps it's not, but it is ultimately a cost to members.

And it's not true to say that the CU would have to write off debts on death without the insurance. Without the insurance, the CU would have the option of pursuing the estate for repayment, if it chose to do so.



Bronte said:


> While it is financially logical that of course borrowing at 12% when you have savings at 1% makes no sense. But that is to fundamentally misunderstand the people who use a credit union.
> 
> The credit union, any that I've seen are there for it's members. People who otherwise would not get loans from mainstream lenders can go there for loans for cars, holidays, communions, weddings. There's no fuss and bother nor massive form filling and having to send everything to Dublin for a machine to make a decison on refusal. Inevitably the credit union will give you the loan. And sometimes it might be because the credit union committee member might know your uncle, and will therefore take a chance on you.
> 
> They have an immensely important role in helping people to both save and borrow, and have helped keep many people away from moneylenders. That can only be seen as a positive.
> 
> When I was first starting out it was the best way to borrow easily. I like they way they operate, but as many know I cannot stand the banks so I might be prejudiced.
> 
> Banks of course would like to see them wiped out. Both Mr. Bronte and I have operated a CU account each for a very long time, and we get derisory interest as all we do is save, but I know that if ever everything fell apart I'd have no problem getting a loan, but more importantly, as they are a force for good in society I would always support what they do. Anyone who has regularly visited the credit union, as I once did, can only observe and see how people need the credit union.
> 
> It is true that during the boom some credit unions lost the plot. Hopefully they are getting back on track to what their original core business was.



I'm well aware of the role and value of CUs and I'm quite a big fan of CUs as community financial institutions, owned by the their members. I'm certainly not a fanboy for the banks. 

I'm challenging this particular operating practice of the CU, not the CU movement or ethos itself.

It seems to me that the CU is actively trying to keep their members financially dependent on the CU, instead of educating them to be financially independent. It is in the interests of the CU staff and Directors that members continue to borrow, even when there is no need for members to borrow. If the CU truly has the interests of members at heart, they would not be encouraging them to pay interest unnecessarily.

If members find it much more difficult to make payments to savings then payments to repay loans, then the CU should 

1) Be absolutely open and transparent about the price members pay to borrow instead of saving, or
2) Offer alternative services, like a 'nagging' service about payments to savings, to support members to save better, if that is what it takes.

It seems to me that this approach of encouraging members to borrow instead of saving is designed to be in the interests of the CU staff and Directors moreso than the interests of members, who pay the price of the interest margin.


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## Slim

There is some sense to borrowing less than your savings as a 'secured loan' in the CU. Say, for example, you have €5k in savings in the CU. You want to upgrade/instal your domestic central heating or such. The estimate is €4,950. You can withdraw €4,950 from the CU and pay for the upgrade. This will save you about €150 pm in repayments @APR of 5.5% for a secured loan. Then, your car breaks down or you decide to change it so you need €5k quite quickly to get back on the road. You have spent your €4,950 on th heating, the banks are not lending and your CU apply the 4:1 rule, they will lend you €150! Alternatively, you kept your €4950 in shares, borrowed €5k and now you can probably get a loan easily enough for €5k, albeit at the higher interest rate for unsecured loans. Then you crash your newish car and are killed. Your family will not have to find €5k to pay off the loan and will have the savings doubled to €10k, all of which will be a mighty relief to the bereaved family.

Having said all that, the CU is not always a suitable service provider for sophisticated financial management. It is suitable for relatively small amounts of savings and loans. I am a longstanding member of the CU and Board but I still repay the loans I borrow very quickly so as to minimise the interest I pay.

By the way, any CU that charges 12% on loans and only pays 1% dividend is, in my opinion, gouging its members. Our own charges 7% and pays 1%. (5.5% for secured loans.)


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## RainyDay

Slim said:


> There is some sense to borrowing less than your savings as a 'secured loan' in the CU. Say, for example, you have €5k in savings in the CU. You want to upgrade/instal your domestic central heating or such. The estimate is €4,950. You can withdraw €4,950 from the CU and pay for the upgrade. This will save you about €150 pm in repayments @APR of 5.5% for a secured loan. Then, your car breaks down or you decide to change it so you need €5k quite quickly to get back on the road. You have spent your €4,950 on th heating, the banks are not lending and your CU apply the 4:1 rule, they will lend you €150! Alternatively, you kept your €4950 in shares, borrowed €5k and now you can probably get a loan easily enough for €5k, albeit at the higher interest rate for unsecured loans.


Your logic depends on your CU having the archaic policy of lending in ratio of savings, instead of lending based on ability to repay. I heard a lady from my own CU talking a few years back about how the old 3:1 borrowings:savings rule "went out with the ark" and how lending was based on your ability to repay.

The more logical outcome of your scenario is that they pay €5k for the central heating from savings, and if the car breaks down, then they borrow €5k based on their ability to repay, so they only pay interest IF THEY REALLY NEED TO BORROW.

Basing lending on savings encourages the member to pay more in interest than they would otherwise need to pay. It's very hard to see how this is in the members' interest.




Slim said:


> Then you crash your newish car and are killed. Your family will not have to find €5k to pay off the loan and will have the savings doubled to €10k, all of which will be a mighty relief to the bereaved family.


If you have comprehensive car insurance, that will cover the cost of the car. If you want life insurance, pay for it (using the money you saved on interest payments), or avail of one of the many [broken link removed] floating around.


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