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

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
 
@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)
 
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.
 
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.
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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.
 
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.
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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
 
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.
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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.
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I totally agree.
 
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 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).
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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,

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?
 
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.
 
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