CU is encourage me to borrow instead of spending savings

R

RainyDay

Registered User
Messages
4,505
The letter received from my CU last week reads;

I am writing to inform you of important service improvements and great value for members here at xxxx Credit Union .
SECURED SAVINGS LOAN
Don't withdraw your hard-earned shares without looking at all your options!
It is sound financial practice to build up a rainy-day fund, or to save over time for important purchases. And the promotion of such sensible behaviour is a fundamental principle behind credit unions. There are many good reasons not to simply withdraw your savings when you need the money, but to opt for our SECURED SAVINGS LOAN instead.
How much will it cost me?
The special low interest rate of only 6.5% (6.7%APR) is fantastic value, with a Loan of €3,000 having repayments of just €21.23 a week over 3 years and the Total Interest Paid is only €312.41.
For more information on these loans, simply call in to any of our 4 offices locally, or call us on 01 xxxx to discuss it with a member of our Lending team. When collecting a loan, please bring current Photographic Identification with you.
Insurance Benefits
One of the key advantages is that you maximise your FREE Savings and Loan Insurance benefits by taking a loan rather than withdrawing your shares. This will clear your loan and pay-out up to twice your shares to your next-of-kin in the event of death (subject to qualification) .
Other Benefi t s
• Secured Savings Loans can be drawn down on demand* at any of our offices, we can even transfer the funds directly into a bank account for your convenience.
• The extremely low interest rate of only 6.5% (6.7%APR).
• Your savings continue to earn an annual Dividend.
• If you wish to clear the Loan, it can be done at any time from your Shares without incurring any penalties or'extra charges.
• No transaction fees or hidden charges
*Subject to normal underwriting Terms & Conditions
Click to expand...

The member will be financially worse off if they borrow, rather than just withdrawing their savings, as the interest earned on the deposit is less than the interest paid on the loan.

Shouldn't the CU be educating their members, instead of exploiting their financial ignorance and calling it 'sound financial practice'?
 
Similar issue discussed here before:
http://www.askaboutmoney.com/showpost.php?p=1342322&postcount=13

One important point that is omitted above in the text you have quoted.....the CU is encouraging people to keep their savings for a rainy day and take out a secured loan instead. However, should that "rainy day" come along shortly after drawing down a secured loan, you won't actually be able to access your savings because they are secured against the loan (unless the CU allows you switch the loan to unsecured?!).
 
It is sound financial practice to build up a rainy-day fund
Click to expand...

Hi RainyDay - I think that this is the generic use of the term rainy-day and personalised to you.

This is disgraceful behaviour by the Credit Union involved, but the whole concept of a secured loan is widespread in the CU movement.

As a mutual, they should be encouraging good financial practice by their members.

If AIB ran a similar campaign, encouraging people to leave money on deposit at a taxable 1% as security for a loan of €3,000 @6.5%, there would be uproar. The Credit Unions can get away with this sort of stuff.

Some progressive unions actually encourage their members to use their savings rather than taking out expensive loans. And oddly enough, they sometimes have difficulty getting people to do so. Customers sometimes insist on borrowing the money and keeping their savings.

The insurance argument is a nonsense. The premium on €3,000 of a loan and €6,000 of a deposit would be tiny. CUs should cut their loan rates and sell this separately to those who want it.
 
Anyone1 said:
Or maybe the CU should deal with the members personal circumstances and suggest or offer the best thing for them.
Click to expand...

It is never in a borrower's interest to leave money on deposit at 1% while paying 6.5% on the loan. If the CU really think that this is important, then they should charge 1% on the loan.

In regards to your insurance comment, I meant the loss of insurance to the member(many of whom have no insurance at all) and not the cost to the Credit Union.
Click to expand...

That is what I was talking about as well. The borrower can get €3,000 or €6,000 or €9,000 of insurance very cheaply.

The CU should unbundle the insurance and charge separately for it.
 
Brendan Burgess said:
....The CU should unbundle the insurance and charge separately for it.
Click to expand...

Interesting the way the Credit Unions must only follow the CPC, in respect of Insurance products and as such, can effectively force members to purchase insurance as part of taking out a loan.... a Bank for example cannot make it a condition that one product or service be acquired, to obtain another product or service, as I have it.

-------------------
Mr Rainyday,

While I think the loan rate quoted by your Credit Union is quite attractive in comparison to many unsecured rates offered (by Credit Unions or other financial services) I do find myself wondering if I am still as jealous of your Credit Union as I recently thought I was :)
 
Brendan Burgess said:
It is never in a borrower's interest to leave money on deposit at 1% while paying 6.5% on the loan.
Click to expand...

While this is correct mathematically, there is often more involved.

For many people getting the money together to pay for an unexpected expense is serious worry.

A person in this position who has some money saved, may want to pay for a holiday. If they use their savings for the holiday, and the next day their car dies they are in trouble.

However if they borrow the money for the holiday then they are still in a position to deal with unexpected expenses. This flexibility will come with a cost but it may be well worth it to some people. A cost of €67 on €1,000 over a year does not seem excessive.

Obviously if the CU loan is secured on the savings, i.e. the savings cannot be withdrawn while the loan is outstanding that is a different situation.

In short;

- borrowing wile you have savings may make sense, although it comes with a cost.

- CU loans secured against savings are exploiting members naivety
 
Hi Cremeegg

The Credit Union should be teaching its members to manage their money well.

If we follow your argument, then a borrower should not take out a secured loan at all, but they should take out an ordinary credit union loan at 12% - perhaps €120 a year per €1,000 is not too much for the flexibility.

They should put their deposit elsewhere, so they can access it whenever they want.

The CU Secured Savings product should be banned by the CU Regulator

Brendan
 
PolkaDot said:
If you have your deposits elsewhere e.g. a bank deposit account, it's unlikely that you'll get any loan whatsoever from the CU no??
Click to expand...

Most banks lend at least 3 times the amount you have in shares.

So if you have €3,000, put €2,000 into AIB as a RainyDay fund.

Leave €1,000 and the CU should lend you €3,000.

Just to be clear - I am not recommending this. I think you should use your savings instead of borrowing to buy something. But this would be more flexible than leaving your money in the CU.
 
According to the local CU all loans are secured on the shares. And they charge no where near 6%. 1% per month is the tariff round these parts.
 
cremeegg said:
- borrowing wile you have savings may make sense, although it comes with a cost.

- CU loans secured against savings are exploiting members naivety
Click to expand...
At a minimum, I'd expect a CU to have their members interests at heart, and to be very explicit about the cost of borrowing over the cost of withdrawal of savings.
 
Time said:
According to the local CU all loans are secured on the shares. And they charge no where near 6%. 1% per month is the tariff round these parts.
Click to expand...

Hi Time

Are you sure?

The maximum rate they are allowed charge is 1% a month.

I understood that few charged this rate.

Brendan
 
The whole idea of the Credit Union was to borrow and save at the same time. You can argue all you like but that is the foundation stone.

Statute wise 12.5% APR (or 1% a month) is the maximum.
Statute wise there is a right of set off of Shares and Savings against loans. Nothing eartn shattering or new about this.

Most always charged the 1% per month regardless of level of savings and the 'multiple' used to be 3x.

Clearly - some here are not familiar with the structure. Thats not saying it is good or bad - but most of them have survived the tsunami despite the unsecured nature of many of their loans.

Also they do provide savings insurance and loan insurance should you die. This isnt charged directly to your loan but is a charge on the costs of the credit union. Many see it as a difference. There is a legitimate argument that if it were abandoned it would cut the costs of a credit union substantially.

So posters there is a little research to be done when you are using shotguns.
 
@RainyDay why? Because prior to credit unions a lot of people used money lenders. Even look at the UK and payday lenders have charged up to 4,000% APR.

Money (mis)management is a serious social issue.

By getting into the habit of saving - you reduce your need to borrow.

Have a look at the WCCU website.
 
cremeegg said:
While this is correct mathematically, there is often more involved.

For many people getting the money together to pay for an unexpected expense is serious worry.

A person in this position who has some money saved, may want to pay for a holiday. If they use their savings for the holiday, and the next day their car dies they are in trouble.
Click to expand...

Absolutely Cremeegg, there is a lot more involved than maths on this. It's about a concept and a way of managing money precisely so that people understand it's important to pay off loans but also to save. It also changes people's habits.

Rainyday, to get it look at the lovely posts by Janet we had a few days ago.
 
Bronte said:
Absolutely Cremeegg, there is a lot more involved than maths on this. It's about a concept and a way of managing money precisely so that people understand it's important to pay off loans but also to save. It also changes people's habits.
Click to expand...
Wouldn't it be better to change people's habits to minimise the interest that they pay, so they are better off in the long term?

WizardDr said:
@RainyDay why? Because prior to credit unions a lot of people used money lenders. Even look at the UK and payday lenders have charged up to 4,000% APR.

Money (mis)management is a serious social issue.

By getting into the habit of saving - you reduce your need to borrow.
Click to expand...
Sorry, but you really didn't answer my question. Yes, I fully agree that money management is a serious social issue, and that the action of the payday lenders is dispicable.

But in this particular scenario, where people have funds on deposit in the CU, aren't the CU stepping into money-lender shoes by encouraging people to borrow more, instead of spending their savings and then saving again? The borrower is out of pocket for the interest margin. The CU would be better off encouraging the members to mind their finances in the long term by minimising interest payments. So if they need funds, they should spend their savings, and then start saving again, instead of making loan repayments again.

The only justification for this approach would be clear data showing that most people are more likely to repay a loan than to save. I'm not so sure that this is the case, and if the CUs are relying on this, they should have good research to justify it.

WizardDr said:
Have a look at the WCCU website.
Click to expand...
Which one - there is a .
 
Hi Wizard

I think that most people commenting in this thread are familiar with the operation of the Credit Unions.

I agree fully with Rainyday that the CUs should be encouraging good practice in their members. Good practice does not mean borrowing money at 12% while putting money on deposit at 1%. That is bad practice, and the CUs should be stamping it out.

Paying off a loan is often the best way of saving and the CUs should educate their members on this.

The CUs should not force their members to take out deposit "insurance", they should just pay better deposit rates.

I don't think that they should force them to pay loan insurance either, but I could understand why they might do that for unsecured loans. I would prohibit the CUs from imposing compulsory insurance on loans under €10,000, but allow them to impose it on larger loans.
 
You must log in or register to reply here.
Back
Top