Why don't Credit Unions reduce interest rates to get more business?

fayf

Frequent Poster
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149
In another lifetime, i was on one of the committee of a credit union. At the agm, at the end of my term(i declined te-election, when asked), i stood up, and presented a survey i did. It was a typical average loan, (based on the credit unions average loan)and a comparison of the credit union i was with, which was the most expensive, at a rate of 12%, with a nearby local credit union, was the cheapest, charging 6%, and several banks between 7 &9 % at the time. I asked why we why we were genourously rewarding savers, but penalising, those who are the lifeblood of any credit union- the borrowers. They had no answer, and there was a sense i was “upsetting people”, by asking awkward questions. I had no support whatsoever, which is exactly what i expected. I accept there are huge differences between individual credit unions, and many have been forward looking, but others are not.

Things have changed, and now, many Credit Unions have an uncertain future. However, the whole ethos of Credit Unions and the ultra flexibility, of loan repayments, which is not available anywhere else, is something, i often recommend when asked.
 

MrEarl

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2,014
Hello,

That's interesting, as I had a very similar experience a few years ago, when I also tried to tackle the issue of the lending rate, at my local credit union, and got an equally frosty response, from most of my fellow directors.

I just couldn't understand why they firmly believed that they'd be able to safely grow the loan book, at the level needed, without moving from their traditional 12.68% APR.

Like you, I presented a survey of alternative lenders and their rates, drilled home the point about the additional cost to Borrowers, when the CU insisted on a conservative share to loan ratio with shares held as security etc.

I finally got some level of acceptance from them, when I pointed out that the people most likely to borrow at the high rate, were higher risk borrowers, who were unable to borrow elsewhere - and that this in turn, increased the risk of default, with greater potential for loan loss.

In the end, I gave up banging my head against a brick wall, and like you, didn't stand for re-election, after my 3 year term ended. The loan book continued to shrink and the CU was subsequently taken over (oh, eh, sorry... it "merged" with another bigger CU).

I had also been promoting the concept of the credit union essentially demutualising, selling its loan book, and distributing its net assets to its members, but the majority of my fellow directors thought that was a terrible idea - and that it was a far better idea to simply give away our members assets to another CU, that had no connection with our community, and would most likely just asset strip our little CU.
 
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Brendan Burgess

Founder
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42,568
In the end, I gave up banging my head against a brick wall
Hi Mr Earl

That is my feeling entirely when dealing with them. Everyone else is to blame, particularly the Central Bank for stopping them expanding.

They are just closed to new ideas.

Brendan
 

Protocol

Frequent Poster
Messages
3,247
Two good posts by fayf and MrEarl.

What is the answer?

A new model, a different model?

I still think there is something to be said for competing on price.

I accept the point made earlier than PCP is not a direct comparison with CU personal loans.

Could a CU lend at 4.9%, and cover
  • cost of funds (=0%?)
  • operating costs
  • credit risk
  • surplus
 

Cavanbhoy

Registered User
Messages
19
My local Cu rates are 9.5% under 10k
7.5% over 10k
5% for student loans
Some people will just apply for loan with bank they are with regard less of rates. For a lot of people still convience is a bigger factor than rates.
 

24601

Frequent Poster
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250
I still think there is something to be said for competing on price.

I accept the point made earlier than PCP is not a direct comparison with CU personal loans.

Could a CU lend at 4.9%, and cover
  • cost of funds (=0%?)
  • operating costs
  • credit risk
  • surplus
Not to labour the point but credit unions aren’t particularly expensive for unsecured personal loans relative to the banks. The ones that insist upon high levels of savings as collateral are though, but that’s nearly a separate argument.

Also, reducing rates would cannibalise their existing loan interest income as there just isn’t sufficient demand for consumer credit. It is also very unlikely that most credit union borrowers are as price sensitive as people seem to be suggesting here. If they halved their rates they’re not going to double their lending.

A credit union couldn’t lend at the rate you are suggesting and generate a profit without massive cuts to operating expenses that would result in branches that are more in line with the skeleton bank branches we see today.
 

jpd

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2,106
Ah! - so Credit Unions are just a way to employ more local people locally.

This is no doubt a good thing but it would be better if it was clearly stated as an aim of the Credit Unions.
 

Protocol

Frequent Poster
Messages
3,247
OK, so reducing rates to grow consumer lending isn't really a solution, ok.

So what to do with huge amounts of deposits?
  • Put them into Govt bonds / bank bonds earning 0%?? This happens at the moment, but the investment income has fallen and fallen.................
  • Apply negative rates to drive away deposits? (Not realistic IMHO)
  • Lend them out for mortgages?? Some CU are doing this............
  • Lend somewhere else?
  • Combine many CU together / lend to social housing sector / long-term loans to councils / AHBs / could this be turned into a bond market so that the debts might be liquid?
 

MrEarl

Frequent Poster
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2,014
Which in turn may be the end of credit unions
In some instances, that's actually the best solution - better to see some credit unions dissolve, and distribute their net assets to their membership.

The historic CU model doesn't have a future - so better for those who can't / aren't willing to evolve - to do the right thing for their members, rather that risk eroding their members' assets.

If An Post's circumstances were different, there's probably a decent arguement for amalgating it with the credit union movement - then maximise the opportunity for synergy.
 
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