cost of credit union borrowing

Re: That's a bit better

scud

I spoke to the manager of a credit union who did not want to be named. This is what he said verbatim:

APR isn't the true cost because we calculate interest on a reducing balance.
Our gross rate is 10.5%
We pay a rebate of 20% which brings the APR down to 8.4%
Anybody in the Credit Union has to be a saver to get a loan.
The 3 or 4 times savings is obsolete for 10 years now
On a loan of €10,000 for one year, you will pay €450 interest, so the "effective cost" is 4.5%.
Click to expand...

It is clear to me that the Credit Union movement does not understand APR. The APR on this loan is clearly 8.4% and this is the true rate of interest on the loan beforetaking into account the requirement for a deposit. In my view, the "flat rate" of 4.5% is meaningless and totally misleading, although I accept that it was not intentionally misleading.

I established that a borrower must have savings but I could not establish what percentage of the total loan, so it's not really possible to establish the true, true APR.

Brendan
 
Re: That's a bit better

scud said:

Modern Credit Unions do not insist on a savings account minimum balance offset...
Click to expand...

I am delighted to hear this, but I have only come across one credit union who does not insist on it or encourage it. And there is something strange in the Credit Union Act which does not allow you withdraw your savings if you have a loan.

Brendan
 
Re: That's a bit better

scud, you actually reinforce one of the main criticisms of
credit union lending policies:
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.
Click to expand...
so what's the apr? why the rigmarole? why can't the credit
unions quote a simple apr figure like everyone else is obliged
to? how is a borrower expected to compare the above offer
with offers from banks or other lenders all of whom will quote
a single apr figure with no qualifications? terms like
"reducing balaces, rebates, etc." are all factored into the apr
rate and should be unnecessary.

also, while i'm sure many or most people get good deals from
their credit union, there have been a number of people
who've posted to this site who've ended up paying rates of
between 18% and 22% apr. these may be isolated cases - i
don't know - but it shows some of the criticisms here don't
just apply to 80s era credit union policies.

actually, i didn't really want to get into this debate again. i
just wanted to provide a formula which would allow people to
compare the cost of credit union borrowing against that of
other lenders.
 
> Re: That's a bit better

Darag said:

why can't the credit unions quote a simple apr figure like everyone else is obliged to? how is a borrower expected to compare the above offer with offers from banks or other lenders all of whom will quote a single apr figure with no qualifications?

Who has ever seen or heard, any bank or lending institution, quote anything “…without qualifications”?

“…How is a borrower expected to compare…” Today AIB website calculated (with qualifications!) the cost of a €10k personal loan over 60 months with an APR of 9.8% at €229.63 per month. Strangely enough BOI quote the same loan, same period, same APR but costing €236.46. So! Single APR! Simple comparison! I think not! AIB’s APR of 9.8% is cheaper that BOI’s APR of 9.8% (with qualifications, of course!)

“…why can’t the Credit Unions quote…” They can’t because as this discussion demonstrates there is no such thing as a “…simple APR…”. If my memory serves me correctly the obligation to quote APR’s was made obligatory to assist comparison of loans at a time when rates were quoted but real cost and charges were hidden. Exact science it ain’t!

Credit Unions don’t, by law, have to quote APR (although the IFSRA, Credit Union Section requires them to make the calculation on their annual returns to IFSRA).

Cut to the chase. It would seem from the “qualified” quotes I found online today that if I borrowed €10k over 60 months and wanted to make the same payment amount each month, I will end up paying the following ACTUAL cost:
From BOI: €2,869.40
From AIB: €2,504.00
From MyCU: €2,454.80
From UB: €2,282.00

However the cheapest I found was: if I was willing to pay one 60th of the principle each month (€166.67 - 60th payment would be €166.47), plus the interest due at that month end, for 60 months:
MY CREDIT UNION: €2,256.11.

I don’t want a loan of €10,000 now! As a matter of fact I have at present “investments” in my credit union in excess of that. Why? Because some of the other members of my credit union might need to borrow €10,000 now. When they do borrow the money I want my credit union to “encourage” them to keep saving/investing in my credit union as well as repaying the loan. Why? Because some time in the future I might want to borrow more than €10,000 and if they don’t save, the funds won’t be there for me to borrow.

My advice?
If you want to borrow funds, contact your lending institutions and ask them how much in total you will have paid at the end of the term. Don’t be an APR fool! Live in the real world! Show me the money!
 
well done

I, too, will do an analysis of the total cost of borrowing 5k or 10k from various institutions.

I will do it tomorrow, and am confident that the CU will have the lowest cost.
 
Re: well done

scud, you quoted that your credit union would charge you €450 for 12 months on a €10k loan. This was exactly the same figure which my anonymous credit union manager quoted me. He said that no high street bank would beat it.

I fed those figures into the AIB and Bank of Ireland calculator and the interest was €461 and €476 respectively. The HUGE difference is that neither AIB nor Bank of Ireland require me to be a saver, so they work out a lot cheaper.

There are problems with APR, but they are very small compared to a manager of a credit union quoting me an effective rate of 4.5%, when the true APR was in excess of 10%.

The idea of a credit union is very nice, but the reality is that they cost a lot more than the high street banks. If you cannot get a loan from a high street bank, then certainly go for the credit union.

One of you mentioned that the banks will put you in the ICB if you don't pay up. What will the Credit Unions do? Anecdotal evidence suggests that they get jailing orders much more quickly than any other lender. When I heard this first, I didn't believe it. But one credit union, around the 20th largest in the country, told me that they jail around 2 people a year on average. They say they have sympathy for those who can't pay, but they go for those who can and won't pay.

Brendan
 
my experience

Here is my experience concerning my balance on deposit/in shares while I have a loan from my credit union.

I've been saving and borrowing from my credit union for many years. A long history of regular saving and prompt repaying.

In 2001 I got my biggest ever loan from them. It was for €25k over 10 years. (At the time I was purchasing my first house so I budgeted my cu repayment as if it was part of my mortgage repayment). I've been happily repaying my cu loan every month.

When I got the big loan I thought that the ratio of loan to savings was 6:1 so I increased my savings balance of €4,200.00. A while after I got my loan I noticed the publicity leaflets advertising loans from my cu stated that the required ratio for loans was actually 10:1.

In the back of my mind I noted that the correct savings amount for a loan the size of mine would be €2,500.00 which meant I had €1,700.00 more on deposit than I really needed to have.

I never did anything about this as I felt my money was on deposit and I could access it if I ever needed it. Eventually I wanted to buy a sitting room suite for my new house. I decided to finance the purchase by withdrawing €1,700 from my credit union (i.e the amount I had on deposit in excess of their loan to savings ratio).

When I enquired at my credit union I was told that I would not be allowed to withdraw the €1,700. They said "your loan is secured against that money so you are not allowed to withdraw it". When I pointed out that the ratio was 10 to 1, and that my deposit amount was well in excess of their required ratio, the person I spoke to merely repeated the line about my loan being secured against that money.

It seems very odd to me. Basically I have €1,700 more than I need to have on deposit with them and they will not let me withdraw it.
 
Re: my experience

Hi CUCustomer

This is the bit in the Credit Union Act which needs to be changed. A few credit unions sensibly advise their borrowers to withdraw their savings and to borrow only what they need. A lot of customers don't do this and find the same problem you discover.

It's absolute madness borrowing at 9% while having money on deposit at 2%. But you can't explain this to most people.

Brendan
 
Above

But Brendan most of us save all the time while we pay massive borrowing costs. We're all MAD, MAD, MAD.

We do it at AIB, BOI by keeping money at lousy deposit rates, while we repay car loans, credit cards, and ,nay, even overdrafts with the same crowd. There isn't a difference, you know- even though you're publically unlikely to admit.

I'm not a CU user, but much like some other dogma's, this is one I fear you can't change, because you've worn the clothes too long. I think CU's do wonderful job in meeting the needs of there target market. If this statement was untrue, then CU's wouldn't be so successful. Long live CU's, I say. Long live the banks, Long Live diversity of opinion, Long Live Brendan, and may he continue to challenge us, at at times entertain us with his inflexibilities.
 
Re: Above

Hi Nutter

We do it at AIB, BOI by keeping money at lousy deposit rates, while we repay car loans, credit cards, and ,nay, even overdrafts with the same crowd. There isn't a difference, you know- even though you're publically unlikely to admit.
Click to expand...

Worse still are people with a balance in their current account earning no interest, while having a loan elsewhere. These are the real nutters.

But there is a difference, as far as I know, only the Credit unions insist that you keep money on deposit while borrowing. Their customers do it through stupidity or inaction and when you point this out to them, some of them change.

Brendan
 
Credit Union Borrowing

I see no problem in using the calculator above to calculate APR. However, there is no one ratio of savings to loan. Many loans are lent at a ratio of 10:1 or even higher. The criteria is now (a) ability to pay and (b) the record of the member. To use the calculator implies a rigidity in the formula that is not there. Any member who takes out a loan should be advised that their current level of savings is frozen unless they set up a "slash one" account into which they can transfer any surplus balance and keep saving and withdrawing.

Many of the contributions here seem to suggest that one should have no savings while repaying a loan, unless the situation pertains where the savings rate exceeds the loan rate - most unlikely. Everyone, IMHO, needs a little cash in reserve, even if it is pledged against a loan. Incidentally, you cannot pledge your SSIA balance against a loan but you CAN pledge your DIRT EXEMPT Special Term Account against your loan. Even if your share balance is secured against your loan, if circumstances demand, you can ask the CU to reduce the ratio.

The arguments here have been going on for a year now and not much progress has been made. If the sums don't add up, you are better to borrow somewhere where they do. But, Credit UNions are not trying to mislead anybody. Many of us would not have seen the figures quoted here on APR etc. CU directors are all amateurs trying to do the right thing. The dilemma is that people like to borrow from CUs and a very high percentage repay the loans, compared to banks. Coincidence? I think not. The added security of savings against loans keeps the bad debts down and enables us to lend to those who cannot borrow from banks.

Slim 8)
 
Re: Credit Union Borrowing

But, Credit UNions are not trying to mislead anybody.
Click to expand...

I'm sure that is the case but going by my own experience and Brendan's posts above this does not mean that they DO end up misleading people nonetheless.

An update on my earlier post - neither the ILCU nor my own CU branch have replied to my email query from Tuesday...
 
Re: Credit Union Borrowing

I checked with our Credit Union and they do loan some multiple of savings. The multiple varies depending on your history with them, i.e. previous loans.

Interestingly even though I've been a member since I was a kid (almost 30 years) and have had a token payment going in every week to savings, I'd only qualify for the lowest multiple because I'm not considered to have a history.

-Rd
 
Re: Credit Union Borrowing

I'm in a similar position except that I haven't been lodging money in ages. I was thinking about withdrawing my money and just sticking it in a unit linked fund since I've obviously done without it for years now.
 
Re: Credit Union Borrowing

I went to the CU a while back with the intention of moving a loan I had with One Direct (they had pissed me off). I assumed the CU would be cheaper (I didn't have the sifficient multiple to get the loan in the first part with the CU, but since

I'd been paying One Direct for over a year without a hitch, and I clearly had the income to cover the loan, I presumed the CU would be delighted to get the business from One Direct.

How wrong I was. First of all, I still didn't have the right multiple of savings. Obviously since I had withdrawn much of what I had in order to borrow less from One Direct - Silly Me!!!

Secondly I didn't have a history with the CU (almost 30 years of regular savings doesn't count).

I was refused, on those two grounds, which is fair enough, it's their policy. I kept the loan with One Direct.

But the funny thing is a while later the asked me to come in and meet the loans committee. I was going to be abroad when they wanted to see me. I didn't bother arranging another date. I'm sorry now I didn't. It would have been interesting to hear their explaination for some of the issues raised here.

Maybe I'll stick in another application in the hopes of another invite. :)

-Rd
 
CU borrowing et al...

Brendan said in his post "A simple explanation of APR" that: "...APR is the true rate of interest on a loan. If you borrow €100 and pay €12 interest at the end of the year, the APR is 12%..."
If that's the case then my CU, with an interest rate of 9% HAS an APR of 4.5% because that is what it would cost me in interest.
What about the cost of having to keep deposits in place?
Well to get a loan from my CU (MY - as in I own part of it!!!) I have to have demonstrated that I can afford to repay the loan. I do that by saving regularily then reduce the sum I regularily save by the sum of the principal and interest repayment. Rocket Science!

In another posting Brendan said:
There are problems with APR, but they are very small compared to a manager of a credit union quoting me an effective rate of 4.5%, when the true APR was in excess of 10%.
Is the term "true APR" different to "APR"? I think this is where the problem lies. What is APR? Is it the Annual Percentage Rate? Is it the Actual Percentage Rate? Is it the be all and end all irrefutable, indisputable, rock solid reliable ratio that guarantees level comparison? No!
It is a fairly good indicator at best. You just can't work backwards from a quoted APR and be sure you are correct.
Ask the arkward questions when looking for finance. How much will I have paid you back by the time I'm finished? Then compare the COST!
 
Re: CU borrowing et al...

Hi crugers

If you borrow €100 and make no repayments for the year and they charge you €12 at the end of the year, then the APR is 12%. That is the definition of APR. The A stands for "Annual".

If you borrow €100 and repay it in equal instalments over the year , then the average amount borrowed will be €50. If they charge you €4.50 interest, then the APR is 9%.

The Credit Union is not interested in APRs, because it would be obvious to their customers that they are very expensive compared to most of the banks.

But if you don't like APRs, we will use the repayment calculators and you will still see that the Credit Unions are dearer. It's just a lot harder to calculate repayments.

Brendan
 
The Myth's

Brendan, your inclusion in Myth 1 and conclusion that CU's offer bad value insn't borne out even by your own collection of facts. CU's do offer good value, because they lend where others don't, their generally much more humane, the decision making is local by your peers, and the rate isn't over 12% as stated here, but 9% or so.

That rate for an account that takes variable repayments, including over the counter, ( unlike DD's etc), is GOOD VALUE FOR MONEY. Yes there's cheaper finance elsewhere for the middle and upper market, but to rule out CU's still, appears like bias rather than balanced judgement.
 
Re: The Myth's

Hi Harold

I suppose the Myths are headlines, so they might be amplified by a short statement, if we do go down the road of doing the Myths seriously.

But many people who can borrow elsewhere, should avoid the Credit Unions. The fact that they think they are getting good value is a big Myth.

Brendan
 
Re: The Myth's

An update on my query about CU lending criteria/practices. I just received the following from the ILCU:

Thankyou for your email.

One must maintain savings in your share account when one is looking to borrow - this acts as security for your loan. Each credit union has its own loan policy so if you contact your own branch they will advise you on how much you can expect to borrow .

Hope this helps,
Kind Regards,
Reception Desk
ILCU
Click to expand...
 
You must log in or register to reply here.
Back
Top