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

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.
 
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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MrEarl said:
In the end, I gave up banging my head against a brick wall
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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
 
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
 
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.
 

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.
 
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.
 
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?
 
Pinoy adventure said:
Which in turn may be the end of credit unions
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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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A few people with CU loans I know, like the ability to pay back the loan early and extras life death benefits/insurance...is it worth the extra few % on the loan, probably not to most people but some like the sound of the extras..Also I think many still trade on the community aspect and word of mouth passed from parents to child. We all know people could easily change mortgage providers to save money but don't, it's just inertia for most people and familiarity that keeps certain business running. You only have to look at the CU documentary series on RTE to see how people view them.

I would like to see the age profile of CU customers with loans, would be an insight.
 
I know a few self employed business were started up with c.u. loans from scratch bit by bit while the owner was still on the dole .Now tell me any bank that would back such a business starting out in that circumstance.These are still small independent business employing 4 or 5 full time and another few part time staff and very sucessfull .
 
DublinD said:
Yeap, but not all are penalty free for doing so I thought? Aren’t CUs penalty free? Still not a game changer for the extra costs.
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I'm glad you asked.

Key Post - How Personal loans work: Making early repayment & overpayments

Inspired by a discussion in another thread, I couldn’t find a Key Post on how Personal Loans work, particularly around repaying Personal loans early, so here’s first attempt at it. I'm happy to take feedback and make amendments for people’s experiences with different lenders, and any practical...
www.askaboutmoney.com

Cost rarely comes into it. People borrow where they're familiar with. I'm worked with several retail banks. There's a reason they all try to get students to open current accounts with them - a huge percentage of their lending is to people who hold their primary account with that bank.

Same with credit union - a lot of lending business is repeat customers.
 
Thanks RedOnion, big eye opener in your link-shows the CU advertising worked on me! ...like many things in Irish finance, scratch the surface into T&C/regs and many truths revealed!!
 
DublinD said:
Thanks RedOnion, big eye opener in your link-shows the CU advertising worked on me! ...like many things in Irish finance, scratch the surface into T&C/regs and many truths revealed!!
Click to expand...

I don't think I've ever seen credit unions insinuate that you can't pay off a bank loan early, it's probably just that banks don't advertise this as much as it's not something that they really want to encourage as it erodes the return on loans. Also, credit unions are attempting to compete with PCP/HP type products and moneylenders on two different fronts in addition to competing with banks so they place more emphasis on the flexibility of the terms and conditions.
 
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