cost of credit union borrowing

D

darag

Guest
hi, i'm not sure if this is the correct place but the last time
credit union loans were discussed, the messages ended up
here. one aspect of the discussions which bothered me was
the fact that despite arguing the pros and cons of borrowing
from the credit union, no-one seemd to be able to say what
the true apr of a credit union loan was. the other night i
sharpend a pencil and tried to waken the few brain cells i've
left which can handle sums and worked out a formula which
might be useful when considering a credit union load.

the formula i came up with is: if r is the credit union loan
interest rate, d is the interest earned on savings and f is the
fraction of loan which must be kept as savings, then the true
apr of the loan is: (1+r-f(1+d))/(1-f) - 1

so for example if you are told your loan will be charged at
9.5% (r is 0.095) while currently deposits are earning 3% (d
is .03) and you'll have to maintain 30% of your loan amount
in savings (f is .3), then the true apr is gotten by plugging
these values into the above formula which comes out in this
case at about .122857142 or 12.3% apr. this apr rate only
holds if the borrower always insures that their savings acount
has the absolute minumum to meet the credit union
demands. so every month, as well as putting money into
paying off their loan, they will use the excess savings that
this frees up to pay off more of their loan.
 
Just to put this post in context this was one of the most extensive topics about CU lending:
 
apr

Im still not sure what the difference between APR and ordinary interest rate is. Can someone explain

eg, if I take out 10k at 10% and the interest is worked out monthly then interest charged is balance*10%/12.
Whats the apr got to do with it? If the APR is say 12% (it always seems to be 2-3 points higher) then how does that affect my calcs above.
 
Re: apr

I don't know the maths but APR is the real cost of credit - for example the nominal rate may be applied to the loan annually, monthly, weekly or daily leading to different APRs. APR takes these different approaches to interest calculation and other ancillary charges into account in order to yield a single figure that can be used to compare different loans from different lenders on an equal basis.

This topic might also be of help:
 
Re: apr

Hi darag

Your formula is correct, but most people can't handle abstract formulas. They must deal in actual numbers.

Credit Unions don't phrase it "you must keep 30% of your loan on deposit". They say - "we will lend you 3.3 times your deposit".

So the best way for most people to approach it is:

You have €1000 on deposit at 3%, so you get €30 interest.
You can borrow €3333 at 9.5%, so the interest will cost you €317.
The net interest is €287
The net loan is €2333
So the APR is 12.3%.

Come to think of it, that's just as complex as your formula.

The simplest rule is: "If your credit union requires you to keep a balance on deposit when you take out a loan, then it's much dearer than an overdraft with AIB or Bank of Ireland. You should cash your savings in the credit union and borrow what you need from the bank.".

Brendan
 
odd, isn't it?

If the CUs are more expensive for loans than other financial institutions, then how come they have over 2 million members and billions in loans?
 
Re: odd, isn't it?

The same reason only 50% of people with a credit card clear their balance each month?
 
Re: odd, isn't it?

And the same reason that 30%+ of mortgage borrowers are lured in by one years discounted rates offered by lenders who charge the highest standard variable rates from years two onwards. Ignorance and inertia. I was just talking about loans with some colleagues about loans yesterday and was amazed that some of them who are generally fairly astute when it comes to financial matters automatically assumed that the CU offered good value on loans.
 
Above nonesense

The above info is accurate for about 1980. The garbage about CU rates continues in the media because the League of Extraordinary Gentlemen, ( aka The League of Credit Unions) couldn't score in a brothel.

Modern Credit Unions do not insist on a savings account minimum balance offset, and indeed this was evident from a few of the recent RTE money programmes.

Today my CU will give borrowers 10.5% headline rate, and rebate 20% at the end of our financial year, a net rate of about 8.5% typically. However we apply our rate on a reducing balance basis, and for a loan say of 10k repaid over 52 weeks we'd charge about €450.
 
Re: Above nonesense

Modern Credit Unions do not insist on a savings account minimum balance offset, and indeed this was evident from a few of the recent RTE money programmes.
Click to expand...

A little bird tells me that all was not what it seems in this context on those shows. As far as I know many CUs do indeed still insist on deposits being maintained while the loan is outstanding.
 
Above

That's self serving nonesense. Ring up and interview a few GM's of top CU's, and in the meantime stop posting inaccurate comments.
 
Re: Above

I don't see how it's self serving nonsense. I have nothing to gain and arguably, as a member of my local CU, something to lose by pointing out that the CU lending practices may not be a transparent or competitive as other institutions'? Anyway, last time I checked my own CU required deposits to be held while loans were issued. Obviously people should double check with their own CU(s).

P.S. I've emailed the ILCU and my own CU for some up to date answers to some borrowing related questions such as (a) does money have to be kept on deposit/in shares while borrowing (b) what is the APR applicable to loans (exclusive and inclusive of any interest rebates) (c) does the APR take int account money that must be held on deposit (d) is borrowing capacity calculated based on the amount held on deposit/in shares. I'll let you know how I get on.
 
Re: Above

scud said in another thread:
Perhaps Statler could ring the GM of any main CU like Tullamore, Newbridge, Bishopstown, etc and check his knowledge, then after eating a bit humble pie he or she might enlighten us as to the findings. The stuff on AAM about Credit Unions is inaccurate, but then again so is a lot of other self serving opinions where their is an on-line community need to see the world in a particular way, ie an inbuilt prejudice.
Click to expand...

So I rang Newbridge Credit Union

Me: What is your APR?
Them: We don't have a fixed APR - we charge interest of €2.01 per week per €1000 borrowed. So because we charge interest on a reducing balance, that works out at 5.3%
Me: Whoooooa? Is the €2.01 interest or repayments?
Them: Interest only
Me: Well €2.01 x 52 = 109.2 or 10.92% APR
Them: No - because it's charged on a reducing balance, it's only 5.3%
Them: And we give an interest rebate of 20% at the end of the year
Me: if I wanted to borrow €5,000 would I need to have money on deposit?
Them: Yes, you would need €1000 to 1500.
Me: So if I had €1000 on deposit, I couldn't withdraw it and borrow the €5000.
Them: No. You would have to keep it on deposit
Me: What's the rate paid on deposit?
Them: 3.5% last year
Me: Can you send me a brochure on APRs as there is nothing on your website?
No: Come in and we will quote for you.

My interpretation of this
They may be breaking the law by not quoting an APR but CUs may be exempt from the Consumer Credit Act
They certainly have no understanding of what APR means. This is about the third time, that a Credit Union has quoted me an APR which is half the correct rate.

Where they are confused is with the old style of bank loans who used to charge a flat rate of 7%, which worked out at an APR of around 13%. 2.01 a week is 10.92% a year APR( or 11.5% if they compound it which I suspect that they do).

The real APR of Newbridge Credit Union
If I have €1000 on deposit and borrow €5000 to buy a car for €4000. Net amount borrowed: €4000

Interest paid 5000 @ 10.9% = €545
Less 20% rebate = 109
Less deposit interest = 35
Total interest paid = 401

Amount of loan = €4,000

True APR = 10%

Not bad, but it doesn't make the Sunday Tribune/AAM Best Buy Lists and if they were covered by the Consumer Credit Act, they would face a reprimand for misquoting rates

Brendan
 
That's a bit better

Suddenly we've gone from over 12% to 10% for a flexible loan that won't trigger reports in the ICB, but its still not accurate, because loans are available without deposits. Try ringing the GM there, his name is Des Diver to validate, then we can start correcting some of the guff here.
 
Re: That's a bit better

Perhaps Statler could ring the GM of any main CU like Tullamore, Newbridge, Bishopstown, etc and check his knowledge, then after eating a bit humble pie he or she might enlighten us as to the findings.
Click to expand...
Perhaps scud could check his/ her facts and who actually posted the comments (s)he is referring to, then after eating a bit of humble pie he or she might withdraw that comment.

Posted on another thread:
I've already done so and I'm challenging you to verify your comments.
Click to expand...
Scud, you seem very keen on others making phone calls and verifying their comments. Perhaps you might like to present any evidence or facts you have to back up your assertions?
 
Re: That's a bit better

Suddenly we've gone from over 12% to 10%
Click to expand...

To be fair ... from the ILCU webpage:

Interest on credit union loans

'Truth in Lending' is the policy of the credit union movement. Normally there are no fees or transaction charges.

By law a credit union cannot charge more than 1% per month in the reducing balance of a loan. This represents an annual interest rate of 12.68% APR. Some credit union may choose to charge even less than this 1% per month or give a rebate of interest to borrowers at the end of the year. Since the interest is charged only on the outstanding balance of the loan, you will pay even less if you repay in a shorter time than planned. Thus the credit union gives you control of your own finances, even when you are a borrower.
Click to expand...

[broken link removed]

Hence the 12% you mention. If the ILCU can't propagate accurate facts about CU loan rates and individual CUs can't answer straight questions with straight answers as above then you can hardly blame some people for being misled.
 
From the Tullamore Credit Union website:

Interest on Credit Union Loans

'Truth in Lending', with no hidden costs, is the policy of the Credit Union movement. By law a Credit Union cannot charge more than 1% per month on the reducing balance of a loan. Tullamore Credit Union presently charge 0.75% per month. This represents an annual interest rate of 9.1% APR (annual percentage rate). Credit Unions do not charge fees or transaction charges.

Saving while Repaying
Members are encouraged to continue saving at all times, even when repaying a loan. Remember that even the smallest amount saved regularly grows quickly, and that your savings and loan will be doubly protected by insurance. Savings not only help build up your own fund but also contribute to the Credit Union's fund.
Click to expand...

So at least they have the 9.1% calculation correct. And they encourage saving while repaying, so the true APR must be higher.

And from Bishopstown:

The interest rate is under a percent a month, coming to 0.79% a month and 9.9%APR

...
Benefits of saving
...

Easy access to your savings if you wish to make a withdrawal (once not pledged against loans)
Click to expand...

So they don't make the Best Buys list either I am afraid.

They used to be great value when the banks were charging 20% APR. But interest rates have come down by 10% over the past 10 years and the Credit Union has only come down by around 3%. I wonder will this be covered by IFSRA's report into the way financial institutions passed on rate cuts?

scud - Do the arithmetic and then ask why most credit unions are more expensive than banks. Go to your AGM and insist that they stop insisting or encouraging borrowers to borrow at 9% while saving at 3%. It's just madness.

I would love to see the Credit Unions being cheap again and being honest about their rates.

I think that my local Credit Union in Sandymount charges some borrowers around 6% - now that's good value. But they charge most borrowers much, much more.

Brendan
 
I wonder will this be covered by IFSRA's report into the way financial institutions passed on rate cuts?
Click to expand...

Probably not. The whole area of CU regulation is only being sorted out now and they don't currently fall under the remit of IFSRA but rather the registrar of CUs as far as I know:

[broken link removed]
[broken link removed]

The whole "truth in lending" thing rings a bit hollow when it takes long discussions such as this and others on AAM to attempt to get to the bottom of the CU's lending practices and requirements...
 
that's Better

I never said the CU product would make the best buy list, just that the debate about it here was inaccurate. At least now, thanks to Brendan, AAM is looking at rates of 9%, not over 12%. That's a huge difference in a few posts, because a respected participant actually went away and researched it.

Still, despite websites and brochuretalk, loans are widely available without compulsory savings. When these are arranged, and repayments accelerated the CU deal isn't bad at all. Their most important function however is loan availability first day to sections in society not liked by the banks, then there's the mutuality thing, and not getting registered as a bad borrower with the ICB if you miss a few payments.

My problem with AAM was the dismissive manner it wrote off CU's, based on wrong information. Perhaps in future participants will be less cutting. As for the League of Credit Unions properly outlining its case - God help us.
 
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