Secured Loan rate v. Standard Loan rate

H

HelenQ

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Can I just ask what is meant by a Secured Loan Rate with the Credit Union as I note from my local credit union that the rate is 5.5% as opposed to 10.5% at the standard loan rate.

I need to do some renovations to our family home and would like to borrow a substantial amount. I do have an excellent track record with my local credit union in that any loans I have taken out have been paid back well within the time given. I have always lodged more than the required weekly repayment as well as adding to my savings and am in part time employment (I am my husband's carer). The renovations are not to do with my DH's disability but that there are serious issues in the kitchen that need to be addressed.

So can I get a Secured Loan Rate - would my home be used as collateral and if (in the unlikely event) that I would default can the C.U. lodge a judgement against the family home.
 
At a guess I'd say the "Secured Loan Rate" is for a loan less than or equal to your share/savings balance i.e. you are borrowing your own money and there is no exposure to loss for the CU.
 
Can anyone explain why anyone would borrow from the credit union using their secured rate. As far as i can see it only applies where you borrow less than your savings. Why would you bother to do that. You give them 10,000 to look after for you and you then borrow 5,000 of your own money and pay them 5.5% for the privilage. Why not just spend your own 5000 and save paying the 5.5% interest
 
Secured rate refers to any secured loan, it can be secured against several things, not necessarily your savings.
 
wbbs said:
Secured rate refers to any secured loan, it can be secured against several things, not necessarily your savings.
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Nah, in a credit union context the term 'secured loan' when associated with a lower interest rate, refers to a loan that is less than savings. A loan greater than savings, even if secured by a property, will be charged at the higher rate. It is, of course, a 'secured' loan but is charged at a higher rate.

Can anyone explain why anyone would borrow from the credit union using their secured rate. As far as i can see it only applies where you borrow less than your savings. Why would you bother to do that. You give them 10,000 to look after for you and you then borrow 5,000 of your own money and pay them 5.5% for the privilage. Why not just spend your own 5000 and save paying the 5.5% interest?

Indeed, the only rationale would be the insurance of loan and savings, i.e if the borrower dies, then the loan is cleared (usually, some people may require a health declaration first and may be refused insurance) plus savings can be increased on death, max would be doubled, depending on age of saving etc and an overall limit, about €13,500 (this may be variable depending on the CU's insurance policy). Also, many people feel that, for small loans, it is easier to keep savings and pay back a loan, rather than eliminate savings and then discipline themselves to save it up again.

Slim
 
ladylu said:
Can anyone explain why anyone would borrow from the credit union using their secured rate. As far as i can see it only applies where you borrow less than your savings. Why would you bother to do that. You give them 10,000 to look after for you and you then borrow 5,000 of your own money and pay them 5.5% for the privilage. Why not just spend your own 5000 and save paying the 5.5% interest
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It's absolute madness and the life insurance issue doesn't justify it.

Imagine the war that would break out if AIB or Bank of Ireland offered such "deposit backed loans". The Central Bank would reprimand them for not acting in the best interests of the cusomer.
 
Brendan Burgess said:
It's absolute madness and the life insurance issue doesn't justify it.

Imagine the war that would break out if AIB or Bank of Ireland offered such "deposit backed loans". The Central Bank would reprimand them for not acting in the best interests of the cusomer.
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Thats a ridiculous statement to make. Nobody is forcing a member to take a secured loan - would you prefer a member to have to pay the full rate if they prefer to keep their savings intact as many of our members choose to do? Emotive descriptions like "absolute madness" should have no place in commentary on a serious financial website.
Every day customers take out loans with AIB and BOi and I'm sure they have savings which they CANNOT use as collateral to reduce teh cost of their borrowing. I am very disappointed in your post!
 
Hi CU Manager

if they prefer to keep their savings intact as many of our members choose to do?
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Is it not your duty as a CU Manager, to advise them that this is not in their financial interests? It makes no financial sense to borrow at 5.5% while getting 1% on their savings.

If, as you say, customers are taking out loans with AIB and BoI every day, while they have savings, this is absolute madness too. If AIB or BoI introduced a product to promote this, I think that the Central Bank would step in.

Brendan
 
Brendan Burgess said:
...It makes no financial sense to borrow at 5.5% while getting 1% on their savings...
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Taking this statement to the extreme - nobody with a mortgage should ever save unless they receive a higher rate on deposit than they pay on their mortgage?
 
Hi Crugers

Someone with €100,000 on deposit certainly should not borrow €100,000 on a mortgage to buy a house.

Someone with a mortgage of €100,000 @ 5.5% ( a very expensive mortgage) might consider building up an emergency fund of €5,000. But people tend to overdo emergency funds and if the loan is as expensive as 5.5%, they should prepay their mortgage as a priority.

Is there ever a case for someone with €10,000 in the CU at 1%, borrowing €10,000 @ 5.5% say to buy a car? I really can't see why they would do this.

They should buy the car for €10,000 and use the repayments they would have made to rebuild their emergency fund. But they are probably a member of the CU in good standing, so they can probably access a loan anyway if there is an emergency.

I know some credit unions encourage their members to withdraw their savings instead of borrowing and I know that some members don't like doing it. But the CUs should act in the best interest of their members and explain the costs of this.
 
Brendan Burgess said:
...It's absolute madness and the life insurance issue doesn't justify it....
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I know of an individual who immediately before going for major surgery took out a substantial loan and lodged it into their shares.
Granted, once they had recovered they used their shares to replay the loan.
 
And would the life insurance have covered it? Certainly a normal life policy would be expensive or void.

Fine, if playing the system like this works, maybe do it. But is that not playing the system against other credit union members?

Brendan
 
Brendan Burgess said:
And would the life insurance have covered it? Certainly a normal life policy would be expensive or void.

Fine, if playing the system like this works, maybe do it. But is that not playing the system against other credit union members?

Brendan
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We do not have a legal duty as we are not subject to the Consumer Protection Code (I have no problem with pointing out to a member that it would cost them less to use their own money). We are legally obliged to highlight the cost of the contract prior to the member entering it so we are fully transparent.
There are many people who are better motivated to pay off a debt rather than build up depleted savings and therefore choose a secured loan as it suits their needs.
I think that your simplistic "whats in the best interest of the customer" ignores the realities of life for many people.
Your comparison with a mortgage holder who has savings in a different post on this thread again ignores real life issues in todays economy. I have substantial savings and I have a mortgage (taken out recently so not a tracker). My net indebtedness is zero but I choose to hold onto my cash so as to enable me to purchase other property if the right opportunity presents itself - there is no chance that I will pay off my mortgage and then sit on my hands when a distressed property presents itself - I would not put myself at the mercy of the banks to enable me to take out a new mortgage in a timely fashion - cash is king right now!

CU Manager
 
Brendan Burgess said:
And would the life insurance have covered it? Certainly a normal life policy would be expensive or void.

Fine, if playing the system like this works, maybe do it. But is that not playing the system against other credit union members?

Brendan
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Well one minute you're lambasting credit unions for being anti member, now you're suggesting the member would be acting anti credit union. Go figure!
 
Just did a quick trawl of our within shares loans issued over the last 6 months.
Some observations:
*All except 3 of the borrowers were over 55 (one of the free life insurance thresholds)
*Average loan size €3,000
*Many borrowers cited the loan purpose was to borrow on behalf of a son/daughter to enable them to pay a lower rate of interest whilst maintaining their (the parent's) savings in tact

The other feature of our within shares loans is that borrowers on the standard rate loan can refinance their loan to the within shares rate once the loan is paid down to the savings amount. We also allow, without exception, the member to pay off their remaining loan with their savings - approx 20% of borrowers choose this option. Unfortunately, within months, many are back seeking new credit and this is a negative factor in loan approval (mainly if affordability is marginal to begin with)
 
CU Manager said:
We do not have a legal duty as we are not subject to the Consumer Protection Code (I have no problem with pointing out to a member that it would cost them less to use their own money). We are legally obliged to highlight the cost of the contract prior to the member entering it so we are fully transparent.
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I don't get this. The Credit Union is a mutual. It should be acting in the best interests of its members. It should not be about whether there is a legal obligation on them or not.


Your comparison with a mortgage holder who has savings in a different post on this thread again ignores real life issues in todays economy. I have substantial savings and I have a mortgage (taken out recently so not a tracker). My net indebtedness is zero but I choose to hold onto my cash so as to enable me to purchase other property if the right opportunity presents itself
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Crugers brought up the mortgage issue. It is not really equivalent.

As an active property investor, I can see what you are doing makes sense.

But it makes no sense in the CU environment. If they are good enough to get a loan today, they can get a loan when they need it in a few months' time. If they are about to buy something next week, then it might make sense to get the loan now just to be sure.
 
CU Manager said:
Well one minute you're lambasting credit unions for being anti member, now you're suggesting the member would be acting anti credit union. Go figure!
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I don't understand your point. I am not saying that they are anti-member, it's just that they are not acting in their members' best interests.

The Credit Union is a union of members, acting cooperatively. It should not be customers vs. lender. If the CU manager knew about this big operation, he should not have given out the loan. It seems to me that the customer was playing the system and could have cost his fellow members dearly.
 
Just did a quick trawl of our within shares loans issued over the last 6 months.
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Very interesting data. I presume a "within shares" loan is what we have been calling a secured loan?

I don't like this borrowing on behalf of a child, but I can see that it might appeal to some people. If the parent is prepared to take the liability, he should simply lend the money directly to the child. However, I see that the child might take a credit union loan statement in their parent's name as belonging to them and they might feel more obliged to pay it off rather than pay off a personal loan.

By doing it this way, the child is paying 5.5% instead of, say, 10.5% if they borrowed directly. But they could save a further 5.5% if the parent just lent it directly to the child.
 
borrowers on the standard rate loan can refinance their loan to the within shares rate once the loan is paid down to the savings amount.
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This is much worse than I thought.

Are you saying that someone who has a loan of €5,000 and shares of €4,000 is paying 10% (not sure what your standard rate is?) on the loan and getting 1% on the shares?

How common is this?
 
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