Secured Loan rate v. Standard Loan rate

[CU Manager]

This is much worse than I thought.

Worse than what? - Not sure what you're getting at there (can you expand a little?)

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?

Our standard rate is now 12%. Within shares = secured loan = 5% and yes, someone in the scenario you outline would be paying 12% on €5,000 and receiving 1% approx in dividend on the savings of €4,000. This has been the CU business model for 50 years!

How common is this?

Most performing loans will start off as a multiple of the savings collateral and then trend down towards the savings amount over several years. Most traditional CU loans are over 3-5 years but the overall loanbook would rollover every 3 years approx. Slightly more tan 33% of the entire loanbook will have savings attached to it. Simple maths - loanbook of €30M will have approx €10M savings collateral against it.

 

[CU Manager]

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.

???? Crossed wires here I think

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.

Except that the insurance is not self insurance - its provided by an insurance company called ECCU owned and operated by the Irish League of Credit Unions

 

[Brendan Burgess]

Hi CU Manager

I am just shocked at how widespread this practice seems to be. I can sort of understand why you might be prepared to get 2% on your savings while you have a mortgage at 5.5% so that you can keep money available for a great property bargain. I don't like, but I can understand why a father might borrow on behalf of his son.

But my example is paying €600 interest on his €5,000 loan and earning €40 on his shares. So on net borrowing of €1,000, he is paying €540 interest per annum.

54% net APR? I am speechless.

 

[CU Manager]

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.

I simply outlined the legal position and qualified it by saying that I have no problem informing a member that its cheaper for them to use their own funds. I further pointed out that pre-contractual information is also provided to the member prior to drawing down the loan outlining the full cost of credit and allowing them to withdraw from the contact without penalty.
You seem to have a conceptual problem with the fact that many people prefer to borrow rather than deplete existing savings. This costs them money in the form of the interest charged - this is explained and yet members choose to borrow anyways for a variety of reasons, some of which I have already outlined earlier.
Its a simple fact that this is a product that members want (especially older members). You have commented, rather emotively, calling such borrowing "absolute madness". I joined this discussion because I take exception to this description, coming as it does, from someone with your public profile.

 

[CU Manager]

54% net APR? I am speechless.

There is no such term as Net APR - no legal definition in any case. We do not require a set amount of savings against a loan apart from a minimum of €10 savings (our own policy) so members have a choice on how much collateral to offer prior to taking out a loan.
Many build up savings to "prove" their ability to manage their finances and live without a set sum every week/month etc and prove their ability to service a loan repayment especially where conventional proof of income is not available.
I have regularly given loans of €10K with savings of just €100 where the member can demonstrate ability to repay. On the other hand I would regularly recommend to certain members to build up a savings pattern where they cannot prove ability to repay in conventional ways (payslips, set of accounts etc).
I am glad that this discussion just requires keystrokes so your expression of speechlessness need not inhibit further typed commentary!

 

[Bronte]

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.

.

I think you're trying to equal a credit union to a bank. The whole ethos of the credit union is about being a collective group who help people who otherwise would not get loans. They are friendly and approachable, if you get into difficulty they are quick to set you on the right road. It's not for financially astute people in general. (as in why would you borrow if you have savings) Part of the ethos is that you must learn to save, many people have problems with this. Logically of course it's better to save and then use that money to spend rather than borrowing, but that's to misunderstand the reality of lives for many people. If they get into good habits of saving with the credit union they wills stay away from money lenders or the likes of GE money and the new absolutely awful thing pay day loans (which should be banned in my personal opinion) This is why the way credit unions do business is good for society. Banks don't want to know.

Part of their culture when you have a loan is that you pay it back but that you also save. People have never been taught to do that. And with the celtic tiger all they learnt was to borrow and never pay back. To get your first loan you must save for a while with them first.

Specifically in relation to a loan that a parent gets out for a child, I know many cases. It can be so the child buys a moped to go to a job, it can be so the child repays a credit card debt that is crippling them, it could be to start a business. In each case the child would be unable to borrow and or has gotton into difficulty. In order to ensure Johnny gets back on track, mum or dad try and help with an easily accessible loan from the credit union. Generally the child pays back the amount and interest. It then instils in that child good habits of paying back loans. I have nothing but praise for credit unions. And if I could bank with them I would. Both me and Mr.Bronte have been a member of a credit union forever as are all my family.

The only bad word I've to say on credit unions is that some of them went beserk during the boom too and lent out fantastic sums in areas where they should not have been lending.

 

[ClubMan]

The whole ethos of the credit union is about being a collective group who help people who otherwise would not get loans. They are friendly and approachable, if you get into difficulty they are quick to set you on the right road.

This is not always true but I'm sure that anecdotal reports to the contrary (such as that of a friend of mine posted elsewhere) will be dismissed by some as "bad luck" or unrepresentative or indicative of some sort of anti-CU crusade.

My friend had to battle with their CU for months in order to, eventually, get them to deign to allow for the offsetting of shares against the outstanding loan balance but still insisting on the retention of a share balance representing 25% of the outstanding loan balance. All provisional and subject to the approval of the board of management of course. In spite of the fact that this (or better still the offsetting of all shares against the outstanding loan balance) is clearly in the best financial interests of the individual given the overall situation (as explained elsewhere).

I agree with Brendan - if regular banks engaged in some of the practices carried out by the CU there would be uproar. But it seems that for some taking a critical view of CU practices is akin to one of our last remaining taboos here in Ireland...