cost of credit union borrowing

Re: Credit Unions and APR

Brendan

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.
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This is untrue. Credit Unions have not been required to publish APRs and will only soon have to do so as part of a voluntary acceptance of a Consumer Credit Directive. The fact is that CUs do not know HOW to calculate APRs and we have been trying to find out for the past couple of years. It had not occurred to any of us in a CU board that the cost of keeping the funds on deposit would/could be calculated into the equation. The ratio of savings:loans is too varied across different CUs and personal to have a rational consistent formula for calculating APR taking this into account.

If you are borrowing 10k for a car, then leaving 1k or 2k on deposit is hardly a real problem. However if you are borrowing 20k - 100k then the ratio may become a real issue. I think we should keep some perspective on this. CUs are what they are and what they are not is - BANKS. The only winners in this debate will be the banks, especially if you, Brendan, announce things like "Myth no 1" and then state your own opinion as a "fact" i.e.the myth.

Remember, only a few years ago, most of us had to establish a savings record in a bank to get a loan or mortgage. The CUs were the places where most ordinary people felt comfortable in saving and borrowing and it was probably the only place many could get a loan.

Slim 8)
 
Re: Credit Unions and APR

If you are borrowing 10k for a car, then leaving 1k or 2k on deposit is hardly a real problem.
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Whatever about it being a problem, keeping 10-20% of the amount borrowed on deposit would surely be an issue for most people, particularly since it increases the effective cost of the loan?
 
Re: Credit Unions and APR

CUs are what they are and what they are not is - BANKS.
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What they are is financial institutions that loan money to people. As such it is valid to compare them to other sources of credit and pass comment on whether they represent better or worse value.

The only winners in this debate will be the banks
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If the banks are a cheaper source of credit then the consumers who borrow from the banks will also be winners. Those who believe they are getting cheaper credit from the CU will lose.

People will always be willing borrow from the CU for other reasons, i.e. The "humane" attitude, the friendly staff, the community concept etc. Or simply to keep that Loan for a house deposit off their ICB record.

They will pay a small premium on their borrowing, but that may not be an issue for them.

I certainly think the CU is a great institution otherwise I wouldn't have savings with them, but I wouldn't borrow a significant sum of money.

But it's not OK for the CU to claim to be cheaper when they are not. Fine if the CU say's look at all this good work, our loans are a little more expensive, we can't quote a proper APR.

The CUs were the places where most ordinary people felt comfortable in saving and borrowing and it was probably the only place many could get a loan.
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All fine and dandy, and admirable. But it doesn't change the fact. Leaving money on deposit increases the cost of borrowing.

The fact is that CUs do not know HOW to calculate APRs
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As a shareholder that worries me. I better start going to the AGM. A formula has been proposed here that will work for all CU's regardless of their savings to loan multiples, so no excuses.

-Rd
 
Re: Credit Unions and APR

Following on again from my earlier posts here's the reply that I got from my own CU branch - note that the hoary old chestnut of APR rears its ugly head again (if that's not too much of a mixed metaphor!):

The answers to your questions are as follows;

* Any shares in a members account, below the level of any loan balance, are locked in and cannot be withdrawn. Therefore the level of shares must be at least equal to the level of any loan balance.

* The amount, which a member can borrow, is not related to a multiple of their shares. When considering a loan application we try to ensure that the loan granted is sufficient for the members needs and that there is some evidence that it will be repaid in accordance with the agreement. In this regard the savings history is important, the size of the loan, the members income, security available, etc... We tailor each case to suit the member's needs.

* APR's can be misleading so we tend not to quote them. The commercial banking sector quotes "typical" APR's but I'm not sure over what term these are calculated. We charge .9% per month on the reducing balance and the actual APR will depend on the term of the loan. Last year we rebated 10% of all interest paid by members in the year which brought the effective rate down to .81% per month.

In considering one loan against another you need to take into account a number of factors such as:

* Charges and costs (both up front and hidden)
* Flexibility of payments (what happens if you wish to pay more, or less, in any period)
* What happens if you fall into arrears?
* Speed of response to application
* Benefits attaching to the loan.

With a credit union loan payments are structured flexibly to suit the member's needs, payments may be accelerated or, by agreement, reduced without penalty, interest is not charged on interest, no penalties attach to arrears and the loan is insured against the death of the member at no extra charge. Most loans are approved on the spot and only large or unusual applications are required to go the Credit committee. For members who wish to insure their loan repayments against sickness, redundancy etc, we will shortly be offering a very competitive product in this area.

If you let me know exactly how much you require, and over that term, I can tell you exactly how much it will cost you with the credit union and you can compare this with other options. Be careful however, to check for the "what if" costs - e.g. What if I fall into arrears? Or what if I want to redeem the loan early?

Finally, as I have outlined above we do not insist that a member have savings at any particular level to obtain a loan but it is part of our philosophy to encourage thrift in our members and encourage them to save some money. To this end we have always managed to pay an excellent dividend (last year we paid 2.5%) and we build in encouragements such as free life insurance on savings and free death benefit insurance for all members with more than €250 in savings.

You must remember that we seek to establish a long-term relationship with our members and only do things that are in our member's interests. There is a big difference between being a MEMBER and a CUSTOMER. I could continue outlining the many other reasons for dealing with the Credit Union but hopefully; I have said enough to whet your appetite. Please call, or e-mail your requirements to me, and we can see how we can help you.
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I don't understand the first point which makes it sound like you can only borrow as much as you have in shares which can't be right. Apart from that, it all seems reasonable enough except the bit about APRs and the fact that savings are locked in while there is a loan outstanding (due to the Credit Union legislation as mentioned by Brendan earlier). I'm not sure that I see the imminent arrival of loan repayment protection as such a good thing myself and would be wary of it involving high charges and little benefit in most cases (as is the case with many loan protection products sold by other financial institutions). It seems particularly odd that the CU now seem inclined to doubly insure loans - i.e. the existing life assurance element on CU loans PLUS the imminent optional repayment insurance. I would question how this offers good value to the majority of members.
 
online loan cost survey

OK, here is my amateur effort at comparing personal loan costs. €5000 borrowed over 36 months.

I looked at Bank of Ireland (website), AIB (website), and two credit unions.

1 BoI

Variable rate interest = 677.20, 8.8% APR
Fixed rate interest = 726.52, 9.4% APR

This excludes payment protection insurance. I suppose the fixed rate is a bit higher due to the peace of mind involved.

2 AIB

Variable rate interest = 725.80, APR = 9.8%

3 Kells CU

Interest cost = 663.23, 8.95% APR

So even though the CU has a higher APR of 8.95%, it is still cheaper that the BoI at 8.8% APR. (I don't know why this is.)

4 ASTI Credit Union

Interest cost = 449.55, 5.99% APR

As the large ASTI credit union has many members, who save and borrow via pay deductions, they pass on these low costs via a low interest rate of 5.99% APR, plus they pay a nice dividend.

You would save over €227 in interest compared to the BoI.

Sure no wonder thousands of teachers have joined the ASTI credit union.
 
Re: online loan cost survey

Hi Protocol

The ASTI certainly seems good value. However, it must be noted that the Credit Union movement doesn't appear to understand APRs and I would check this out before committing to any loan with them.

Why did you leave out the requirement to maintain savings with the Credit Unions? You must factor this in.

But even if you do, it does seem that ASTI will be a very good deal.
 
0's credit union said:
APR's can be misleading so we tend not to quote them. The commercial banking sector quotes "typical" APR's but I'm not sure over what term these are calculated. We charge .9% per month on the reducing balance and the actual APR will depend on the term of the loan. Last year we rebated 10% of all interest paid by members in the year which brought the effective rate down to .81% per month.
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Whoever wrote this simply does not understand the meaning of the expression APR. The term shouldn't matter.

We don't charge interest on interest
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I think she is wrong on this. They charge .9% on the reducing balance. The balance at the end of month 1 is the amount borrowed + the interest less the repayment. So they do charge interest on interest. It's called compound interest. We learned all about it in 2nd year.

The bit about keeping a savings balance is odd. What I think they mean is this: If you have €3000 in savings and more than €3000 in a loan, then you cannot take out your savings. If this is true, then their APRs should be recalculated upwards significantly. Let's say you have €3000 and borrow €12,000. The APR will work out at around 10% to 12% in the first year.
But towards the end of the loan, you will have savings of €3,000 and borrowings of €6,000. Your net borrowings will be only €3,000. The net interest you pay will be around €500 which is an APR of around 17%!

Brendan

Brendan
 
Re:CU borrowing et al

Sorry Brendan!
As I demonstrated in my post of 17/03/04 MY credit Union would be the cheapest!
I do agree with your workings on the APR on the loan repaid in equal installments. My CU charges 9% interest. The APR is 9%!!! No qualifications! It is APR 9%. Its not that I don't like APR's. They are, as quoted by various lending institutions, not an exact science. You said it yourself, they have their problems, consider other indicators like cost per thousand.
My advice is that they are indicators but not the truth, the whole truth and nothing but the truth!
As such, why the facination with CU's not publishing them. Because CU's charge interest on the outstanding principle only and because payments are equally divided over the loan period, the APR for CU's will be their quoted interest rate!
CU's aren't banks they are mutual, financial co-operatives. The theory is that you save so others can borrow. They pay interest so you can receive a dividend on your investment (your share of your CU).
 
Re: Re:CU borrowing et al

My CU charges 9% interest. The APR is 9%!!! No qualifications! It is APR 9%.
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Sorry, this makes no sense, unless they only charge interest once a year and you make only one repayment a year. I would be surprised that they charge interest on the outstanding principal only. I have only ever seen them quotes on the outstanding balance.

I think you will find that they charge .75% per month on the outstanding balance which is an apr of 9.3087% [(1+(0.09/12))^12]

Virtually all banks now charge interest on a balance outstanding basis and virtually all charge equal monthly repayments.

I think what is confusing the CU contributors to this debate is that they are stuck in the way things were done before the Consumer Credit Act came into force. Banks used to charge flat rates. The APRs were usually twice the quoted rates. The banks have brought their interest rates down roughly in line with the drop in Central Bank rates. The CU movement haven't done so.

Brendan
 
Brendan, Brendan, Brendan...
You said " I think she is wrong on this...It's called compound interest. We learned about it in 2nd year..."
Have you forgotten what you learned in 1st year. It's called simple interest! CU's don't calculate the interest daily or weekly or monthly or annually... They calculate it when you come in to make a repayment.
For example:
You take out a loan of €100. If you come in and make a repayment in a weeks time they charge you interest of €100 X interest rate /365 X 7. If you don't appear for another 30 days the interest is charged at "the remaining principal" X interest rate / 365 X 30.

As for the saving ratio. Have you ever had ANY investments at the same time as having a loan, any loan? If you had then your argument against having savings in the CU while borrowing from the CU doesn't hold water.
I have always had savings, somewhere, every time I had a loan. My savings didn't influence the APR of the loan I had. I now choose to save in MY CU. My savings help other members of MY CU. It is not an airy-fairy way of operating. It is called having a social conscience! It could be called very PC. We all do it! Even the BOI got a dose of social conscience recently when their loan making policy to some un-PC third party threatened to affect turnover!
As for freezing your assets until your loan thaws...
The Credit Union Act 1997 allows for saving to be withdrawn down as far as 4:1 loan to savings ratio. However since all CU's are autonomous, the policy in each, may differ and does in most cases.
 
Making sense!

Brendan quote me and then said:

Quote:
My CU charges 9% interest. The APR is 9%!!! No qualifications! It is APR 9%.

Sorry, this makes no sense, unless they only charge interest once a year and you make only one repayment a year. I would be surprised that they charge interest on the outstanding principal only. I have only ever seen them quotes on the outstanding balance.

But Brendan also said:

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%.

So Brendan what am I missing?
I borrow €100, I end up paying back €104.50, the rate MY CU charge is 9% and you worked out that the APR is 9%.
 
Re: Making sense!

As for the saving ratio. Have you ever had ANY investments at the same time as having a loan, any loan? If you had then your argument against having savings in the CU while borrowing from the CU doesn't hold water.
I have always had savings, somewhere, every time I had a loan. My savings didn't influence the APR of the loan I had. I now choose to save in MY CU. My savings help other members of MY CU. It is not an airy-fairy way of operating. It is called having a social conscience!
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Hi Crugers - This is all very well, but I think you are ignoring the compulsory nature of the requirement to keep savings on deposit while borrowing at a CU. If the member opts to keep savings on deposit for social reasons, then that is all very well - but my real concern is that CU's (and CU members) don't consider the impact of this requirement on their cost of borrowing.

For the sake of example, let's say I have 2k in savings at my CU (which has a 5:1 borrowing/saving ratio) and I want to buy a 10k car. If I go to BOI/AIB, I'll borrow 8k and spend my 2k savings. If I go to my CU, I'll have to leave the 2k on deposit and borrow 10k.

So in calculating the total cost of borrowing for comparison purposes, I should look at the following;

AIB/BOI - Interest paid on 8k loan plus interest foregone on 2k savings

CU - Interest paid on 10k loan less interest received on 2k savings.

I guess the CU will come out pretty poorly in such a comparison.
 
Re: Making sense!

Whoever wrote this simply does not understand the meaning of the expression APR. The term shouldn't matter
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I should have pointed out that the response above from my CU was from the manager himself!
 
Re:Re: Making sense!

Hi Rainyday
I just did a quick exercise to compare AIB (online calc) and MY CU.
AIB: €8k loan @ 36 mths X €254.48 Interest paid €1161.28
MY CU: €10k @ 36 X €277.78 Interest paid €1368.55
AIB
If I leave my €2k on deposit for 36mths @1.7% (compounded annually) I will receive €103.64 in interest.
AIB cost €1161.28 add €103.64 TOTAL: €1264.92
MY CU cost €1368.55 less interest rec'd €103.64 TOTAL: €1264.91.
Now where do I get interest on deposit of 1.7%?
AIB 3yr Special term quote 1.85%
MY CU paid 2% last year on deposits.
So the case for the CU coming out poorly in comparison isn't proved. As a matter of fact on balance MY CU does well. If you factor in the warm glow of social conscience, the benfit of no cost CU Loan Protection, the benefit of CU Life Savings insurance, the probability of an interest rebate from MY CU, my financial situation at term end (still have €2,103.64 on deposit) and the fact that it is MY CU, I own it (well a portion of it), I have a say in how it should operate...
My advice still stands. If you are borrowing ask the hard question. How much will I have paid you at term end. Consider all the options... MY CU works for me. (I suspect there are other CU's that don't...)
However this is all a step to the left of the thread origins.
APR. Is it all that it is made up to be? In it's present guise I still say that it is only an indicator and whether CU's quote it or not, it can't be used as the bottom line for loan comparison.
 
Re: Re:Re: Making sense!

If I leave my €2k on deposit for 36mths @1.7% (compounded annually) I will receive €103.64 in interest.

...

MY CU paid 2% last year on deposits.
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Is that gross or net of DIRT or does it apply on one of the DIRT free term accounts?

[broken link removed]

Now where do I get interest on deposit of 1.7%?
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Easy access deposit rates of up to 2.5% gross (2% net of DIRT) are available elsewhere. EBS Sure Certificates return 3.79% gross CAR over six years. An Post Savings Certs give 2.75% gross DIRT free over five and a half years. (Income on both of these can be accessed with no loss of interest by gratual partial encashment of certs at six monthly intervals). EBS members savings bonds are offering 2.75% gross CAR now as well.

www.askaboutmoney.com/clu...RM_SAVINGS
 
Re: Re:Re: Making sense!

Crugers said:

Have you forgotten what you learned in 1st year. It's called simple interest! CU's don't calculate the interest daily or weekly or monthly or annually... They calculate it when you come in to make a repayment.
For example:
You take out a loan of €100. If you come in and make a repayment in a weeks time they charge you interest of €100 X interest rate /365 X 7. If you don't appear for another 30 days the interest is charged at "the remaining principal" X interest rate / 365 X 30
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Hi Crugers. If this is true, we are both wrong in our calculation of APR. It's probably not easy to explain, but I will try.
You borrow €100 and you make only one repayment of €110 at the end of the year. That is, by definition, an APR of 10%.

Let's say that you pay €5 after 6 months and €105 after 12 months, then the APR will be slightly higher than 10%, because you are paying the interest off during the year instead of at the end of the year.

A borrower who is late making payments would thus be paying a lower APR than a borrower who pays on time. I doubt if the Credit Union system does this.

This is how the Sandymount Credit Union, of which I am a member, words it:

"Low interest rates are charged on the reducing balance of a loan rather than continuing on the original balance".

The normal meaning of reducing balance would be the principal + interest charged less repayments.

I will email them.

By the way, to my surprise, my Credit Union charges "5.78%" on loans over €30,000. It doesn't give an APR, so I guess it's around 6%. Not bad value, but it might be better to remortgage your home at 3%.

Brendan
 
CU's and APR

Brendan
I'm not calculating the APR. I'm asking why the facination with APR. I'm recommending that borrowers don't use APR alone to compare loans because of the various actions/options that can distort it.
My original post had 2 examples, one AIB one BOI. Same loan amount, same term, same APR. However the monthly repayments and therefore the sum total to be repaid differed.
So APR is a calculation, a type of statistic, and we should all be aware what can be done with statistics...
If you want to borrow ask for the bottom line. How much will I have paid you back at term end. Gather up all the quotes and apply any formula or ratio you like to assist your own decision. But for your own good treat "Quoted APR's" with appropriate skeptisism.

"The normal meaning of reducing balance would be the principal + interest charged less repayments. "
Not in credit unions. Your loan balance in credit unions is the principal only! You do owe interest but it is never posted / added to your loan balance! Credit Unions do not charge interest on interest!
 
Re: CU's and APR

Why the fascination with APR? Well because IFSRA has this to say about it perhaps?

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Annual percentage rate (APR)

The annual rate charged on a loan taking into account all the costs involved, such as set-up charges for an overdraft permission. It provides a good comparison of costs between lenders.
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Re: CU's and APR

So APR is a calculation, a type of statistic, and we should all be aware what can be done with statistics...
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Hi crugers - It's annoying when two lenders quote the same APR, but different repayments. But the difference is very small and apparently due to rounding. I have not seen APR abused.

But the Credit Unions mislead their members. They make comparisons with lenders who don't require you to retain your savings to get a loan. So the Credit Unions force you to borrow more. And all their literature is full of stuff like: "no hidden charges". The Credit Unions are often very dear and it's important for borrowers to realise that. They are sometimes cheaper and it's important for borrowers to understand that. They are often the only people who will lend small amounts to those most in need and that is why they are very important. But they should be upfront about the true costs of borrowing.

APR is important because it allows loans of different periods and different amounts to be compared simply. If my Credit Union in Sandymount did not quote interest rates, how would I know that borrowing €30,000 was much cheaper than borrowing €29,500? (5.78% vs. 9%)?

Brendan
 
@ last APR

I give up Brendan.
You have gone full circle again...
The banks quoting the same APR's but charging different amounts are just rounding errors.
MY CU loan costing me less than the banks must be a figment of my imagination.
Hard facts don't cut the mustard.
Generalities like "...Credit Union force their members to take out loans..." make sense.
And what ever is said means whatever you want it to mean.
The words: MBO, asylum and lunatics are playing on my mind!
;-)
 
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