Credit Unions to be allowed to charge 24% a year APR

[Protocol]

OK.

But why not offer car loans at 4% instead of 7-8%?

4% is 4x times better return than 1% on bank bonds.

At 4% would not some PCP customers be convinced to switch, as with CU loan you own car outright.

 

[Brendan Burgess]

. People generally aren't price sensitive for small-medium sized personal loans (a point illustrated by this discussion!).

This is a key point that is kind of missed.

24% of €1,000 for a year is just €120 more than a rate of 12%. Or put it another way, €2 a week.

I am a big fan of APR, but it's not that helpful on small loans.

Brendan

 

[Brendan Burgess]

There’s no reason why loans up to €500 couldn’t be turned around in 15 minutes for many credit unions.

Agreed for loans to long-term creditworthy customers.

But these loans are targeted at people in bad circumstances who would require a lot of management and who would have a high probability of default.

There is no way that a business, other than a moneylender, would lend to these customers.

The well established, profitable, Credit Unions should lend to them as part of their mission and accept that they are going to lose on a lot of them. The struggling Credit Unions should avoid them.

Brendan

 

[NoRegretsCoyote]

There's 250 or so credit unions and some of them are backwards but the type you visited is a dying breed. How did you know they were volunteer tellers out of curiosity? I've worked with a huge number of credit union staff and I've never come across a volunteer teller but I also wouldn't be able to tell from looking at them!

Funds are plentiful, yes, and credit unions are in fact pretty keen to not take your money at the moment for that exact reason. They can't lend out enough money but savings are piling in which creates a huge pressure on their capital since they have to keep a blanket 10% of total assets in a regulatory reserve. A significant number of credit unions have introduced temporary caps on savings to try mitigate this problem (which is a total nonsense to begin with, but that's another debate)

Interest rates being low is also a huge problem for them since they have such excess funds.

@24601 I am sure they were volunteer tellers because their productivity was far below the minimum wage, although still greater than zero.

Interest rates being low should also be an opportunity for credit unions, as it allows them greater margins below the legal cap. The problem seems to be that their products are not very interesting for whatever reason. I don't borrow in this space so am not hugely familiar with what's on offer but I know main banks offer unsecured lending in the low thousands with very little due diligence, and for car finance there is now PCP.

You do realise that this idea of "personal knowledge of borrowers' own circumstances" is one of the underlying reasons for the credit frenzy we had during the Celtic Tiger? Banks and credit unions alike lent to people who couldn't afford it but sure it was grand because Mary or John were "sound" and "good for it". Character based lending is a nonsense and doesn't mitigate risk but rather increases it exponentially. That's why some credit unions were carrying arrears of 30/40 or even 50% of their loan books around 2010/11.

The business model never worked particularly well. When credit unions were generating their "best" returns of assets it was very often on the basis of reckless lending coupled with the investment of surplus funds in risky products.

My own understanding was that prior to the early 2000s, credit quality in the credit union sector was reasonably good. After that they got caught up in the easy lending of the time, and obviously arrears soared when one person in six lost their jobs between 2008 and 2012. Despite big fears at the time, very few credit unions actually needed a state-sponsored bailout due to arrears, and losses over the cycle were proportionately lower than at the banks. My own feeling (correct me if I am wrong) is that people prioritised paying back credit union loans over loans to the retail banks. The problems that emerged at certain credit unions seem to be down to poor governance.

If credit unions are struggling at the moment then there is a problem. The economy is booming, lending is growing, and interest rates are super low. If their business model doesn't work then they need a new one. Credit unions have a relatively light regulatory treatment, and are exempt from paying corporation tax. This is because of their local scale and positive social role they have played historically. Some credit unions have started mortgage lending apparently, and now they seem to want to get into sub-prime personal lending. I am not convinced that this easy tax treatment is merited any more if they are moving into the space of the banks and money lenders.

Excellent. But we're talking about credit unions.

My point was more that 'typical' credit unions aren't run like 'Penny Banks' with volunteers recording transactions in a paper ledger. The experience you described is no longer typical of the sector, and most definitely not of those credit unions pushing for legislative changes.
I'm not sure which CU you looked at, but IT cost for most has been unusually high in the past few years due to mergers. However, their IT spend per customer is very competitive compared to banks.

Credit unions are involved in taking deposits and giving out loans. This is banking under any definition. I appreciate IT spend has good reasons to be high, the ancillary stuff on conventions, AGMs, and advertising seems to be very elevated for a body that (by definition) has a local monopoly on credit union services.

 

[Protocol]

They can't compete with PCPs, obviously. They're generally close to zero APR and the costs associated with setting up the infrastructure to do HP type products are prohibitive and it's unlikely that there would be regulatory approval for such a product. There's also a huge amount of risk involved if you don't understand the autotrade market and regardless of all that, PCPs and car finance generally is sold at the point of sale - nobody can compete with that level of convenience. A PCP payment is always going to be small when compared with a straight-up loan on the same car so there's no getting around that cashflow USP for a credit unions.

I am not suggesting that CU enter the HP / PCP market.

I am suggesting that CU compete on price with their personal loans against PCP.

Replacing bank bonds at 1% with loans at 4% means much more income.

However, I accept your points:

charging 4% would cannibalise the existing revenue from customers paying 7-8%

even at 4% there might not be more much volume lent

 

[cremeegg]

Provident, to take an example, can charge 187.2% APR to loan someone 500 quid for a year,

Its actually 157.3%. That may not invalidate your point, but lets stay with the actual figures.

 

[MrEarl]

Hello,

24% interest rates are a very bad idea ....

Credit Unions are supposed to conduct individual credit analysis, to include testing the borrowers ability to repay a loan. So, if someone is struggling to qualify for a loan at 12.68% when the Credit Union assess the borrower's ability to repay, how does increasing the rate to 24% result in them qualifying ?

People who cannot obtain a loan from a Bank, or a Credit Union, under the current arrangements have financial problems - be it their in ability to borrow under "normal terms", or a bad credit history. So, how is charging them a higher interest rate helping them ?

The Credit Unions might think that they can now generate significantly more income each year from loan interest (which might help compensate for the loss of income that they traditionally generated on their surplus funds, by investing them or placing them on deposit with the Banks), but this is very short sighted, if even realistic ....

• Are there suddenly going to be more people borrowing at higher rates, I doubt it.

...and even if there are...

• The quality of those loans will be even more risky given the only people likely to borrow at 24% are those unable to secure cheaper funding, so the chances are that loans granted at this higher rate will have a greater risk of default, and result in the Credit Union having to write off my of their members loans in the future.

If the Government and the Credit Union movement want to do something to help the people, and also enable the Credit Unions to try and lend more, then why not offer some form of guartee scheme in conjunction with the SBCI for example ?

We have the likes of the Credit Guarantee Scheme for businesses, a variation of that could be supported by the Dept of Social Enterprise, whereby a percentage of loans could be guaranteed by the Dept., to help Credit Unions underwrite risk from those unable to borrow under their criteria, but at 12.68%. This guarantee could help support more lending, to those in need, while helping to protect the Credit Unions assets, or perhaps even helping to lower the applicable lending rate given the underlying security from the State.

 

[24601]

OK.

But why not offer car loans at 4% instead of 7-8%?

4% is 4x times better return than 1% on bank bonds.

At 4% would not some PCP customers be convinced to switch, as with CU loan you own car outright.

No, credit unions could charge 0% on car loans but the monthly repayments would still be too high to compete with PCPs. It’s a cash flow product so it’s very much apples and oranges. Credit unions should focus aggressively on the 2nd hand market with an emphasis on nearly new cars from non-main dealers. The jury is out on whether a decrease in interest rates has a sufficiently positive impact on demand to cover the lost margin from the discounting. That said, some credit unions do it successfully. What I see as a big issue in pricing is the early redemption of loans. There has been a huge shift in repayment patterns over the last 10 years. Your typical 5 year car loan is generally repaid over three now. There could be credit unions with interest rates that low but I'm not sure of any.

It would be an interesting for a credit union to try as a once-off exercise in January or July some year - just drop APR for car loans to 4% for the month and see what sort of spike there is.

 

[24601]

@24601 I am sure they were volunteer tellers because their productivity was far below the minimum wage, although still greater than zero.

So you haven't a clue whether they were volunteers or not. What does that sentence even mean?

Interest rates being low should also be an [B]opportunity [/B]for credit unions, as it allows them greater margins below the legal cap. The problem seems to be that their products are not very interesting for whatever reason. I don't borrow in this space so am not hugely familiar with what's on offer but I know main banks offer unsecured lending in the low thousands with very little due diligence, and for car finance there is now PCP.

For someone with limited familiarity with credit unions you do sure have a lot of opinions on them. Your familiarity with bank lending seems to be fairly unfamiliar too. Banks are required to do plenty of "due diligence" for loans "in the low thousands". They might have easier access to the information than credit unions but the process is by and large the same. I'm not sure what relevance interest rates really have in a credit union context at a time of depressed loan demand. They can't lend out enough money so there's no real opportunity. The best performing credit union have loans to assets of around 50%. It seems pretty clear that slashing interest rates would result in a loss of loan interest income and little much else.

[QUOTE="NoRegretsCoyote, post: 1596249, member: 106686"][USER=87658] My own feeling (correct me if I am wrong) is that people prioritised paying back credit union loans over loans to the retail banks. The problems that emerged at certain credit unions seem to be down to poor governance. [/QUOTE]

You're wrong. Credit Union arrears ballooned after the crash. They've done a marvelous job reversing this trend and cleaning up their loan books but there was plenty of credit unions with over half the loan book >10 weeks in arrears around 2011. I'm not sure on the overall average but I have in my head that it tipped 30%. Poor governance was definitely a factor though, yes.

[QUOTE="NoRegretsCoyote, post: 1596249, member: 106686"][USER=87658] If credit unions are struggling at the moment then there is a problem. The economy is booming, lending is growing, and interest rates are super low. If their business model doesn't work then they need a new one. Credit unions have a relatively light regulatory treatment, and are exempt from paying corporation tax. This is because of their local scale and positive social role they have played historically. Some credit unions have started mortgage lending apparently, and now they seem to want to get into sub-prime personal lending. I am not convinced that this easy tax treatment is merited any more if they are moving into the space of the banks and money lenders.[/QUOTE]

Consumer credit demand has been falling recently. Consumer confidence is down and the economic outlook is a bit damper than the media would have you think. The overall consumer credit pie is about half the size it was during the Celtic Tiger. I'm not sure where you think these borrowers are going to spring from? Credit Unions are no longer lightly regulated. They don't pay corporation tax because they're non-profit co-operatives. Many credit unions have being doing small mortgages for years and credit unions have always done small "sub-prime" loans because it aligns with their mission/ethos. I don't know what the "space" of the banks and money lenders is but credit unions issue loans and collect deposits so they've been in whatever that space is for 50+ years, yes.

[QUOTE="NoRegretsCoyote, post: 1596249, member: 106686"][USER=87658] Credit unions are involved in taking deposits and giving out loans. This is banking under any definition. I appreciate IT spend has good reasons to be high, the ancillary stuff on conventions, AGMs, and advertising seems to be very elevated for a body that (by definition) has a local monopoly on credit union services.[/QUOTE]

You don't seem to know what a credit union actually is. Well, you kind of do, but you seem to have some sort of peculiar preconception of what they [I]should [/I]be. They may have a monopoly on "credit union services" but these are the exact same services offered by other institutions so I'm really not sure what you're trying to say at all.

Also, AGM/convention expenses aren't "ancillary" - an AGM is required by law and credit unions have to send written notices to every single member. Also, if they don't advertise their services how do you reckon they'll do any business?[/user][/user][/user]