# 1st CU Loan, €650 in shares, looking for €1.3k, repayments €100/m 18mo = 9.95%.



## Lauralashes (3 Nov 2011)

Hi there,

Just wondering if someone could help me with this - Im applying for my first CU Loan, I have 650 euro shares so was looking for 1300 euro as a loan. The representative advised that the repayments would be 100 euro per month for 18 mths. The Loan rate is 9.95 %. 

Does €500 interest over the 18 mths on €1300 seem quite high?

Thanks,
Laura


----------



## Slim (3 Nov 2011)

Lauralashes said:


> Hi there,
> 
> Just wondering if someone could help me with this - Im applying for my first CU Loan, I have 650 euro shares so was looking for 1300 euro as a loan. The representative advised that the repayments would be 100 euro per month for 18 mths. The Loan rate is 9.95 %.
> 
> ...


 
Yes, that sounds ridiculous. I would estimate that loan would be cleared in 14-16 months based on crude calculations. Total interest 80-100 euro. Are you sure they weren't also adding on Payment Protection Insurance?


----------



## donee (3 Nov 2011)

All CU's have different rates most typically @ 12%. as slim says there could be payment protection insurance inc but unlikely unless they told you it was


----------



## Brendan Burgess (3 Nov 2011)

Hi Laura

Why are you borrowing €1300 if you have €650? 

What is the price of the thing you are buying? If it's €1300, ask the CU for €700 and withdraw €600 in shares.


----------



## donee (3 Nov 2011)

Shares are used by CU's as collateral for loans . Even in good times there would've been very few CU's that would give someone a first loan of €700 with only €50 left in shares after withdrawing €600, a ratio of 14:1. CU's unlike a bank want to see a repayment history before they give you a bigger loan, also Lauralashes doesent say how she put her €650 in, was it weekly amounts or one lump sum, these factors are also taken into consideration when giving someone a loan. And dont forget the regulator is looking over the shoulder of your local CU now more than ever


----------



## ontour (3 Nov 2011)

Another likely scenario is that they are suggesting equal monthly repayments with the remaining amount going in to your share.  In month 1 you may pay €75 off the principal, €15 in interest and €10 in to shares.  By the last payment the interest would be nominal so probably €23/24 euro going in to shares.

Although all credit unions are different, it is very unlikely that your credit union will give you the best return on savings (shares).


----------



## STEINER (3 Nov 2011)

As other posters have mentioned, the €500 over the €1,300 is not interest.  Most CU's have a loan calculator on their website.  My CU will require payback of €1,363 for a €1,300 loan over 52 weeks.  Interestingly they also offer loans at 5% interest fully secured on my shares, so if I needed say €1,000, I'd only have to repay €1,026, cheap  enough.


----------



## ClubMan (9 Nov 2011)

STEINER said:


> As other posters have mentioned, the €500 over the €1,300 is not interest.


What is it then?


> My CU will require payback of €1,363 for a €1,300 loan over 52 weeks.


c. 5% interest is not bad. I haven't seen a _CU _offering that sort of rate on general loans in a while. 


> Interestingly they also offer loans at 5% interest fully secured on my shares, so if I needed say €1,000, I'd only have to repay €1,026, cheap  enough.


2.6% is not equal to 5% so how do you work that out? Normally if the cost is 5% and you also have to keep shares lodged at a dividend of probably 1% or thereabouts then the effective cost of borrowing is going to be (sometimes significantly) higher than 5%.

With regard to the original query ... if the _CU _is the only option here then how about (what _Brendan _may have meant?) borrow €1.3K on the back of €650 shares then once the loan has been granted ask them (insist if necessary) to offset c. €600 off the loan and readjust the repayment amount or term.

Either way crunch the numbers before doing anything.


----------



## Lauralashes (9 Nov 2011)

Hi,

Thanks for the replies -I'll have to go through the figures again with them if its approved. I won't be taking the loan if the interest is €500 thats for sure. I'll try some other places.


----------



## ClubMan (9 Nov 2011)

If you pay €500 interest on a loan of €1.3K over 18 months then that's about 25% and not 9.95% _APR _by my very rough reckoning so something is wrong with the figures/info here.


----------



## ajapale (15 Nov 2011)

Hi Laura,

Ive expanded your title somewhat to reflect your question more fully.

How did you get on with other loan providers?

aj
mod


----------



## CU Manager (18 Nov 2011)

There has been some good and some shockingly bad advice posted on this thread.

First of all, no member has the right to dictate terms to the credit union. Members who sign a loan agreement/contract and then immediately _insist _on changing the terms as Clubman suggests will destroy their credit line in the credit union.

One of the fundamental differences in CU's v banks is that a CU will often engage in "character" lending - taking a member at his/her word when they sign the agreement. Once you get a reputation for not keeping your word, your chances of getting future credit is severely damaged.

@ Clubman - your crude calculations of interest rates (in post #8) are way off and should, ideally be removed from the thread as they will only serve to confuse those seeking advice. You seem to be unaware as to how interest is calculated on reducing balances and the effect this has on the overall cost of credit.

OP - get a copy of the *"pre-contractual information sheet"* from the CU - it will detail the interest rate and the overall cost of credit.


----------



## millieforbes (18 Nov 2011)

CU Manager said:


> @ Clubman - your crude calculations of interest rates are way off and should, ideally be removed from the thread as they will only serve to confuse those seeking advice. You seem to be unaware as to how interest is calculated on reducing balances and the effect this has on the overall costrat credit
> .



Curious post, I would have done the same calc as clubman, I just reworked the numbers and calculated a flat rate of 46% would repay the loan in 17 months at 100 per month.

Maybe you could clarify if it is likely that the shares / loan split mentioned by an earlier poster is coming in to play here?


----------



## CU Manager (18 Nov 2011)

My comment on Clubmans calc's is in relation to Post#8 on this thread i.e. his reply to Steiner
@ Milleforbes I'm not sure what you are referring to I'm afraid. There is no doubt in my mind that the OP's figures are incorrect, hence my suggestion for the OP to get the pre contractual information sheet.


----------



## millieforbes (18 Nov 2011)

CU Manager said:


> @ Milleforbes I'm not sure what you are referring to I'm afraid. There is no doubt in my mind that the OP's figures are incorrect, hence my suggestion for the OP to get the pre contractual information sheet.



Fair enough, I didn't get that from your post


----------



## ClubMan (18 Nov 2011)

CU Manager said:


> @ Clubman - your crude calculations of interest rates (in post #8) are way off and should, ideally be removed from the thread as they will only serve to confuse those seeking advice. You seem to be unaware as to how interest is calculated on reducing balances and the effect this has on the overall cost of credit.


Why not point out where I went wrong so that we can all learn something? If I borrow €1300 and pay back €1363 over a year then the effective rate is surely c. 4.8%? Do you get a different result?


CU Manager said:


> There has been some good and some shockingly bad advice posted on this thread.
> First of all, no member has the right to dictate terms to the credit  union. Members who sign a loan agreement/contract and then immediately _insist _on changing the terms as Clubman suggests will destroy their credit line in the credit union.
> On of the fundamental differences in CU's v banks is that a CU will  often engage in "character" lending - taking a member at his/her word  when they sign the agreement. Once you get a reputation for not keeping  your word, your chances of getting future credit is severely damaged.


_CU _customers also have certain rights under prevailing _CU _legislation. It's not always clear which takes precedence - the law or the loan agreement/contract. Individuals need to make up their own mind what is best for their situation. What the _CU _may recommend may not always be in the customer's best interest. I was making some suggestions that might help the original poster and others. It's up to them to weigh this up along with other options. I don't have any vested interest in this context.


----------



## CU Manager (18 Nov 2011)

@Clubman - you can't use simple math to work out the rate. You dont borrow the €1300 for a full year. You only borrow the €1300 for a week until you make your first payment, then the principal borrowed (and the interest charged) reduces and so on for all 52 weeks.
To keep even payments through the term, the lender uses an amortisation table to work out the payments.
When you amortise €1300 over 52 weeks @9.5% interest, the payments are €26.23 per week i.e. €1,363.96. Total cost of credit is €63.96.
Thats a long way off 4.8% and I think that post 8 needs to be removed/amended as its very misleading!


----------



## ClubMan (18 Nov 2011)

CU Manager said:


> When you amortise €1300 over 52 weeks @9.5% interest, the payments are  €26.23 per week i.e. €1,363.96. Total cost of credit is €63.96.
> Thats a long way off 4.8% and I think that post 8 needs to be removed/amended as its very misleading!


I borrow €1300 and pay back €1363.96.

(€63.96 / €1300) x 100 = 4.9%

But you want to call it 9.5% instead? And at the same time - I think - imply that my figures overstate the cost of borrowing?

Sorry - I'm confused. As I normally am when the _CU _tries to explain what a great deal they give people due to only charging interest on the reducing balance of the loan (which most or all lenders do anyway without making a song and dance about it), quoting rates that do not reflect the effective total cost of borrowing when stuff like having to keep 25%+ of the loan balance on deposit/in shares at marginal returns is factored in and telling them about this marvellous free insurance that they offer that comes at no cost to anybody at all at all...


----------



## CU Manager (18 Nov 2011)

@Clubman - you dont seem to grasp the fundamentals of how loan interest is calculated. This isn't a problem per se, except that you reply to other posters here with an air of authority and people would be lead to believe that you are giving them correct information.
If you believe that you are borrowing the €1,300 for a full 52 weeks then fine but, in reality you are not. Your principal outstanding is dropping every week. Look at the table below which shows you teh amortised cashflow of payments split between capital and interest over the 52 weeks (*can you work out the interest charged in the 1st week*? then *do the same for each week by reference to the principal remaining at the start of that week!* ):
Principal Pay    Int Principal
1,300.00 (26.23) (2.38) (23.86)
1,276.15 (26.23) (2.33) (23.90)
1,252.25 (26.23) (2.29) (23.94)
1,228.30 (26.23) (2.24) (23.99)
1,204.32 (26.23) (2.20) (24.03)
1,180.29 (26.23) (2.16) (24.07)
1,156.21 (26.23) (2.11) (24.12)
1,132.10 (26.23) (2.07) (24.16)
1,107.94 (26.23) (2.02) (24.21)
1,083.73 (26.23) (1.98) (24.25)
1,059.48 (26.23) (1.94) (24.29)
1,035.18 (26.23) (1.89) (24.34)
1,010.85 (26.23) (1.85) (24.38)
986.46 (26.23) (1.80) (24.43)
962.04 (26.23) (1.76) (24.47)
937.56 (26.23) (1.71) (24.52)
913.05 (26.23) (1.67) (24.56)
888.48 (26.23) (1.62) (24.61)
863.88 (26.23) (1.58) (24.65)
839.23 (26.23) (1.53) (24.70)
814.53 (26.23) (1.49) (24.74)
789.79 (26.23) (1.44) (24.79)
765.00 (26.23) (1.40) (24.83)
740.17 (26.23) (1.35) (24.88)
715.29 (26.23) (1.31) (24.92)
690.37 (26.23) (1.26) (24.97)
665.40 (26.23) (1.22) (25.01)
640.38 (26.23) (1.17) (25.06)
615.32 (26.23) (1.12) (25.11)
590.22 (26.23) (1.08) (25.15)
565.06 (26.23) (1.03) (25.20)
539.87 (26.23) (0.99) (25.24)
514.62 (26.23) (0.94) (25.29)
489.33 (26.23) (0.89) (25.34)
464.00 (26.23) (0.85) (25.38)
438.62 (26.23) (0.80) (25.43)
413.19 (26.23) (0.75) (25.48)
387.71 (26.23) (0.71) (25.52)
362.19 (26.23) (0.66) (25.57)
336.62 (26.23) (0.62) (25.62)
311.01 (26.23) (0.57) (25.66)
285.34 (26.23) (0.52) (25.71)
259.64 (26.23) (0.47) (25.76)
233.88 (26.23) (0.43) (25.80)
208.08 (26.23) (0.38) (25.85)
182.23 (26.23) (0.33) (25.90)
156.33 (26.23) (0.29) (25.94)
130.39 (26.23) (0.24) (25.99)
104.39 (26.23) (0.19) (26.04)
78.36 (26.23) (0.14) (26.09)
52.27 (26.23) (0.10) (26.13)
26.13 (26.18) (0.05) (26.13)


----------



## CU Manager (18 Nov 2011)

ClubMan said:


> Sorry - I'm confused.


Yes, CU's are striving to improve the financial literacy of all our members - bear with us!


----------



## Brendan Burgess (18 Nov 2011)

Hi CU Manager

1) I agree with your calculations of the interest rate. 

2) I don't agree that mistakes on askboutmoney should be deleted. You have corrected it. That should be good enough. 

3) The key point, as you have pointed out, is that the figures quoted in the OP appear to be wrong. 

4) As I pointed out to Lauralashes, it is crazy borrowing €1300 when she has €650 in shares. She should withdraw as much as she is allowed and borrow the balance. 

Brendan


----------



## CU Manager (18 Nov 2011)

@Brendan 
On Point 2 - fair enough, its your website

With regard to Point 4 - Its a perfectly logical position. However, I know from experience that many CU's will look unkindly on a member with only a nominal shareholding (not saying that its right - but thats the reality).

I would say that what you are proposing is somewhat different to what Clubman suggested earlier in the thread - suggesting that the OP get the loan required with the shares attached and then, once drawn down, insist on having the shares applied against the loan. I took issue with such a suggestion as it will destroy the members credibility in the CU - that amounts to bad advice (whatever about the logic of only paying interest on the net balance required)


----------



## ClubMan (19 Nov 2011)

OK - somebody explained it to me in simple terms...

I borrow €100 and the cost of credit is €10.

If I repay nothing then at the year end I owe €110 and the _APR _is 10%.

But if I make monthly repayments of €110 / 12 = €9.17 then at the year end I owe nothing. However in this case the average capital balance outstanding throughout the year is €50. So the _APR _is (€10 / €50) x 100 = 20%.

So in the earlier case:

€1300 borrowed, cost of credit €64, term = 52 weeks, average capital balance roughly €650 so _APR_ is (64 / €650) x 100 = 9.85% (very roughly).

I stand corrected, am happy to have learned something and it's good to know that the fundamentals can be explained simply in this way.

I stand by my suggestion that the original poster and others at least consider the option of borrowing and then immediately requesting share capital to be offset against the loan. The _CU _legislation allows for this and in some cases this may be an appropriate course of action. It all depends on the individual's circumstances. For example where somebody just needs a once off loan from the _CU _and does not expect to require further credit. Or they happen to be with a _CU _which actually treats its members in a reasonable fashion  and recognises that borrowing while holding significant savings (as a proportion of the sum borrowed) is usually not in the individual's best interests and doesn't victimise/penalise them for dealing with such an anomalous situation.


----------



## ClubMan (19 Nov 2011)

Brendan Burgess said:


> 4) As I pointed out to Lauralashes, it is crazy borrowing €1300 when she has €650 in shares. She should withdraw as much as she is allowed and borrow the balance.


You'd imagine that even with an inflexible _CU _she should be able to withdraw €425 leaving €225 in shares against which she can borrow for times that amount or €900 which when added to the withdrawn shares gives her €1325? The cost of credit should then be significantly lower than borrowing the full €1300 while also keeping €650 in shares at a (most likely) marginal return.


----------



## Brendan Burgess (19 Nov 2011)

> I stand by my suggestion that the original poster and others at least  consider the option of borrowing and then immediately requesting share  capital to be offset against the loan. The _CU _legislation allows  for this and in some cases this may be an appropriate course of action.  It all depends on the individual's circumstances.


I don't agree with this approach. 

If someone has borrowed money in good faith and subsequently learns about the way that some Credit Unions are charging people high interest rates on loans while paying little or nothing on deposits, they should take the action you suggest.

But if you know that these are the terms and conditions of the loan, I don't think it's appropriate to set out to do it in advance.

Having said all that, I think that the Credit Union Regulator should stop the credit unions treating their own members like this.

Brendan


----------



## ClubMan (19 Nov 2011)

Brendan Burgess said:


> I don't agree with this approach.
> 
> If someone has borrowed money in good faith and subsequently learns about the way that some Credit Unions are charging people high interest rates on loans while paying little or nothing on deposits, they should take the action you suggest.
> 
> But if you know that these are the terms and conditions of the loan, I don't think it's appropriate to set out to do it in advance.


Fair enough - but needs must in some case and people can make up their own mind as to what's reasonable/fair in such circumstances.


> Having said all that, I think that the Credit Union Regulator should stop the credit unions treating their own members like this.


I totally agree.


----------



## ajapale (19 Nov 2011)

Topic Reminder:
    	> Credit Union issues   	> 

Would all  posters please stick as closely as possible to the facts of the case as outlined by the OP and refrain from personalised off topic remarks.

aj
moderator


----------



## Sandals (19 Nov 2011)

Slim said:


> Are you sure they weren't also adding on Payment Protection Insurance?



I was told lately that the CU aren't in a group that can sell PPI (have another post on AAM with full details).


----------



## Slim (20 Nov 2011)

Sandals said:


> I was told lately that the CU aren't in a group that can sell PPI (have another post on AAM with full details).



Many do. It used to be called RPI, Repayment Protection Insurance, but for some reason the title of the product was changed. Some may have chosen not to. A link to the thread you mention would be interesting.


----------



## ClubMan (20 Nov 2011)

This thread?

    	> [URL="http://www.askaboutmoney.com/forumdisplay.php?f=39"]Insurance not covered in other forums   	> Other PPI - Company who would look into it for you[/URL]


----------



## Slim (21 Nov 2011)

ClubMan said:


> This thread?
> 
> > [URL="http://www.askaboutmoney.com/forumdisplay.php?f=39"]Insurance not covered in other forums     > Other PPI - Company who would look into it for you[/URL]


 
Thanks Clubman. Any credit union which wishes to sell insurance products etc must seek an approval from the Regulator/IFSRA under section 48 & 49 of the CU ACt , 1997. Not every CU chooses to do so.


----------



## Protocol (22 Nov 2011)

Clubman,

I also often noticed this issue with calculating and displaying interest rates on CU loans.

In STEINER's example, a 1300 loan costs 63.96 in interest paid back over a year.

So I would say to myself, that's good value, the interest is 4.9% of the principal.

However, the rate quoted by the CU would always be higher, in this case 9.5% interest.

Technically and legally they may be correct.

However, surely it does the CU a disservice by quoting a rate that makes loans seem more expensive than they are?


----------



## ClubMan (23 Nov 2011)

_APR _is the figure that loans should be compared one In this case 9.5% is the relevant measurement. This is not making the loan appear more expensive than they are. This is the standardised cost of borrowing.

Don't forget to factor in the general requirement to keep 25% of the loan balance in shares at a marginal dividend return into the calculations of the effective cost of borrowing.


----------

