Is this really bad advice from Credit Union?

Uncle Pierre

Wondering about an email I got from the Credit Union last week. Hope this is the correct forum for it.

First up, just to say my only involvement with the CU is a savings account where I put a lump sum for our young son a few years ago, just to keep it completely separate from my bank. Have added a little to it from time to time, but other than that, am not a “real” CU user since I’ve never looked there for loans or anything else.

Anyway, last week got an email where they’re promoting “secured loans”, and it seems like really bad advice to me. Wondering what anybody else might think.

It starts like this (and ignore the bad English): When you build your savings up, it can be hard to see them drop. Sometimes things come up that just need paying for. For example; your car insurance and tax are out at the same time; none of us want to pay for this out of our savings, we want holidays and to treat ourselves. So why not keep your savings in tact and avail of a secured loan?

Already seems like bad advice to me, to go into debt to pay for something that you’ve already got the money for. Car tax and insurance are necessities, so why not pay them yourself, and then if you still want a luxury like a holiday, consider taking out a loan for that instead?

But then it continues: By taking out a Secured Loan, your savings are held against the amount borrowed. This means you will not have access to the portion of your saving that equals your loan amount.

So now they’re telling you that say you’ve got €1,000 but would rather spend it on a holiday than your tax and insurance, you still won’t be able to spend it on that holiday since you can’t touch it if you take out a loan to pay for the car stuff.

And then it gives an example: If you borrowed €1,000, and set the repayments over 5 years, you would pay €19 a month. The cost of the loan would be €130, so the total amount paid back would be €1.130.

So now they’re suggesting that you could spread your annual car tax and insurance over five years??? So, still be paying in 2025 for tax and insurance that expired in 2021? And what do you do next year? Take out another five year loan to pay then as well, and be paying until 2026 for something that expired in 2022?

This all makes no sense to me. To be honest, have never really seen the attraction of Credit Unions, and this makes me wonder even more. Curious to hear other people’s thoughts.

pwurple

Credit unions are under pressure at the moment, because fewer people are taking out small loans. This is how they earn their income, pay their staff etc.

They are encouraging people to take out loans, to survive.

Uncle Pierre

I understand that, but the question is, surely this is really bad advice for anybody?

It's basically saying:
1) Take out a loan when you don't need to,
and
2) Spread an annual payment over five years.

?????

Mrs OBumble

Yes, it's really, really bad advice.

You'd be forgiven for thinking credit unions are a dumb idea.

PHG

Hi UP,

Yes it is very ****ty and quite irresponsible on their behalf from what I take from your post.

Also, no access to your savings, so what is the point in the loan if you could pay it off anyway

PhilOssophy

Well plenty of people are gullible fools who would take out 5 different ones of those @ 19 euro a month....not realising that within no time they will be struggling to pay them all off.....especially if they want to go on another holiday, etc.
But hey, financial institutions make money off people borrowing money they can't afford for stuff they don't need.

Salary Negotiator

It's not advice, its an advertisement.

CU are in the business of selling money and like any business they are trying to convince you that you need their product.

dartboardio

Not surprised.

I once had a cashier working in ulster bank tell me not to get a loan and that they weren't worth it!

If her manager had of heard her..

Mrs OBumble

Mrs OBumble wrote: »

Yes, it's really, really bad advice.

You'd be forgiven for thinking credit unions are a dumb idea.

People just automatically assume that they are. Some are much better than others.

My own one has decent enough rates, think a loan secured by shares is under 5%, but some of them are crazy. I've seen upwards of 7.5% for a similar loan in the "Member First" group of CUs.

The likes of the Garda CU offer everyday loans at over 8.5% which seems high enough. Both An Post and BoI can beat that.

AlmightyCushion

Deleted User wrote: »

People just automatically assume that they are. Some are much better than others.

My own one has decent enough rates, think a loan secured by shares is under 5%, but some of them are crazy. I've seen upwards of 7.5% for a similar loan in the "Member First" group of CUs.

The likes of the Garda CU offer everyday loans at over 8.5% which seems high enough. Both An Post and BoI can beat that.

These secured loans make no sense to me. You're basically borrowing your own money and paying them interest for doing it.

Jim2007

Uncle Pierre wrote: »

This all makes no sense to me. To be honest, have never really seen the attraction of Credit Unions, and this makes me wonder even more. Curious to hear other people’s thoughts.

They are selling a product, not offering you advice. If you think they are offering you bad advice, then you are getting a lot of it every day from every financial institution that tries to sell you a product.

BarryD2

Jim2007 wrote: »

They are selling a product, not offering you advice,

That's true. I guess the OP's issue though is that credit unions are likely considered by most to be more ethical in how they promote their products compared to the larger institutions.

I'm sure they vary from branch to branch and you can't judge all from this. But it'd make you wonder and you can see how less careful people get suckered into taking out loans and exposing themselves when they don't need to. Given that CUs traditionally deal with citizens considered less financially literate, this one ought to be more careful?

loyatemu

isn't that how Credit Unions work? You can't just walk in and get a loan, you have to have savings already built up. I've never really understood the point.

Uncle Pierre

Salary Negotiator wrote: »

It's not advice, its an advertisement.

.

Jim2007 wrote: »

They are selling a product, not offering you advice.

Semantics here, but I'd submit that their advertisement contains advice that somebody should consider taking out a loan to pay something that they actually have the funds to pay for, rather than paying it from those funds.

To me, it's wholly irresponsible.

On Jim's other point, about similar material from other financial institutions - I happen to have a leaflet here from one of the main banks, saying “Personal Loans from €1,000 approved in three hours”. It gives the interest rate, and various terms & conditions in the small print. But nowhere does it even come close to saying anything like “take out one of these loans when you don’t need to”, the way the CU does. Nor does it suggest spreading an annual payment over five years.

quokula

I think the point isn't the semantics of advice / advertisement, but the fact that this is an utterly nonsensical product. Obviously any institution selling a financial product stands to gain something for it but there are usually some circumstances where it might make sense to the customer or at least be desirable if inadvisable.

But this... they're charging you interest to effectively borrow your own money from yourself. There is no situation in which that makes any sense whatsoever.

The sales pitch the CU locally give me, and it has got some merit I suppose, is that if you have 5k saved, and a bill of 5k arrives in the door, you're better off getting a 5k loan to pay the bill, because if anything should happen to you (hit by a bus, ACME anvil lands on you, etc) and you're killed, your loan is wiped out, and depending on your age, the savings are doubled up and given back to your next of kin.


Whereas if you paid with your savings, and the anvil landed on you or the box of TNT Dynamite exploded in your face, you'd have no savings at all to use.

Uncle Pierre

BarryD2 wrote: »

Given that CUs traditionally deal with citizens considered less financially literate......

I think this is very, very relevant.

Call that email an advertisement or advice or whatever you like, but looks like most would agree with me that it's irresponsible?

AlmightyCushion

Deleted User wrote: »

The sales pitch the CU locally give me, and it has got some merit I suppose, is that if you have 5k saved, and a bill of 5k arrives in the door, you're better off getting a 5k loan to pay the bill, because if anything should happen to you (hit by a bus, ACME anvil lands on you, etc) and you're killed, your loan is wiped out, and depending on your age, the savings are doubled up and given back to your next of kin.


Whereas if you paid with your savings, and the anvil landed on you or the box of TNT Dynamite exploded in your face, you'd have no savings at all to use.

When you die won't the loan just go against your estate? i.e. If you have a €5,000 loan and €5,000 savings, your next of kin will get nothing as the savings cancel out the loan.

Regardless, it still makes little financial sense. Borrow money to pay for things instead of savings because if you die you won't have to pay off the loan.

lordlame

Deleted User wrote: »

The sales pitch the CU locally give me, and it has got some merit I suppose, is that if you have 5k saved, and a bill of 5k arrives in the door, you're better off getting a 5k loan to pay the bill, because if anything should happen to you (hit by a bus, ACME anvil lands on you, etc) and you're killed, your loan is wiped out, and depending on your age, the savings are doubled up and given back to your next of kin.


Whereas if you paid with your savings, and the anvil landed on you or the box of TNT Dynamite exploded in your face, you'd have no savings at all to use.

Or just take out life insurance. Why pay interest on your own savings?

emeldc

AlmightyCushion wrote: »

When you die won't the loan just go against your estate? i.e. If you have a €5,000 loan and €5,000 savings, your next of kin will get nothing as the savings cancel out the loan.

Regardless, it still makes little financial sense. Borrow money to pay for things instead of savings because if you die you won't have to pay off the loan.

Unless the rules have changed there is auto life insurance built in. When you die the loan dies with you but your savings are secure.

AlmightyCushion

emeldc wrote: »

Unless the rules have changed there is auto life insurance built in. When you die the loan dies with you but your savings are secure.

Fair enough, I didn't realise that. I still think it's stupid.

Uncle Pierre

Deleted User wrote: »

The sales pitch the CU locally give me, and it has got some merit I suppose, is that if you have 5k saved, and a bill of 5k arrives in the door, you're better off getting a 5k loan to pay the bill, because if anything should happen to you (hit by a bus, ACME anvil lands on you, etc) and you're killed, your loan is wiped out, and depending on your age, the savings are doubled up and given back to your next of kin.


Whereas if you paid with your savings, and the anvil landed on you or the box of TNT Dynamite exploded in your face, you'd have no savings at all to use.

Ah. Just when I'd decided for once and for all that there's no real point to sticking with a CU if you're financially literate and at least somewhat financially sound, there you go with an argument which I hadn't heard before, and which yes, does have some merit.

Might start saving regularly with them when I'm about 70, and then take out a massive loan when I'm about 80. Or whatever the upper age limit is.

_Brian

My dad died suddenly some time ago and his CU loan was wiped out and their savings not taken to cover it.

It was an immense relief to my Mum at the time.

piplip87

My OH has had one of these loans for the past few years. She got an inheritance and out all in the CU. She took out a secured loan against a portion of her savings for a new car.

Her logic been that when she has this loan paid off by her weekly payments she will then have the funds to upgrade the car again. If she took the money out and bought it saving he money might be harder than paying off a loan....

Steer55

I rang local credit union this morning to ask how much dividend I would get on opening an account with €20,000. She said zero, I refrained from asking her how much they would charge if I had to borrow the 20k :-)

emeldc

AlmightyCushion wrote: »

Fair enough, I didn't realise that. I still think it's stupid.

I agree the sales pitch used in the OP is wrong. I don't think the CU is actually suggesting that you pay your tax and insurance over 5 years, in fact there's no way they would lend you money like that. But for some people with say 5k saved, it's better for them if they borrow a few K over say 24 months rather than depleting their savings. The fact that they 'owe' the money makes them more disciplined to pay it back. At the end of the term they have paid a few quid in interest but they still have their full savings. They have also built up a valuable credit rating. In general I think CU's are much easier to deal with than the banks. They will also lend you up to 3 times your savings. Will the banks?

Amirani

Steer55 wrote: »

I rang local credit union this morning to ask how much dividend I would get on opening an account with €20,000. She said zero, I refrained from asking her how much they would charge if I had to borrow the 20k :-)

Not really surprising, it's costing them money to hold your savings so no reason for them to pay you interest for the privilege.

As regards there being a difference between their deposit rate and their lending rate, how else would they make money?

AlmightyCushion

AlmightyCushion wrote: »

These secured loans make no sense to me. You're basically borrowing your own money and paying them interest for doing it.

The justification for it hinges on a number of points:

- proves to them you can meet regular repayments, should you ever need a (bigger) loan
- improves your credit rating with other financial institutions
- the funds stay in your account should anything come up like an emergency medical bill or whatever. If you just took out the cash you're stuck trying to get a loan at the last minute
- you earn a dividend based on the cash left in your account
- it's dirt cheap (a €2k loan over two years @ 4.6% costs less than a fiver a month interest)
- the communal aspect: a more profitable credit union means a better one, no point being in a CU where nobody takes out loans

AlmightyCushion

emeldc wrote: »

I agree the sales pitch used in the OP is wrong. I don't think the CU is actually suggesting that you pay your tax and insurance over 5 years, in fact there's no way they would lend you money like that. But for some people with say 5k saved, it's better for them if they borrow a few K over say 24 months rather than depleting their savings. The fact that they 'owe' the money makes them more disciplined to pay it back. At the end of the term they have paid a few quid in interest but they still have their full savings. They have also built up a valuable credit rating. In general I think CU's are much easier to deal with than the banks. They will also lend you up to 3 times your savings. Will the banks?

We don't have credit ratings here like the US. Taking out loans does not benefit you when it comes to taking out something like a mortgage, if anything it will only hurt you.

4k over 5 years at 8% is nearly €900. A lot more than a few quid and nearly a quarter of what they borrowed. They would be better off checking how much the loan costs per month, using their savings to pay for whatever it is and then putting the monthly cost of the loan into their savings. If they are disciplined enough to save the 5k, then it doesn't take much more discipline to save it back up again. What is the point of saving money, if you are going to borrow money instead of using your savings?

quokula

piplip87 wrote: »

My OH has had one of these loans for the past few years. She got an inheritance and out all in the CU. She took out a secured loan against a portion of her savings for a new car.

Her logic been that when she has this loan paid off by her weekly payments she will then have the funds to upgrade the car again. If she took the money out and bought it saving he money might be harder than paying off a loan....

She could have paid weekly into a savings account with the exact same outcome, except she'd have been receiving interest instead of paying it.

Uncle Pierre

emeldc wrote: »

The fact that they 'owe' the money makes them more disciplined to pay it back.

Think that just goes to show how this sort of thing is really for people with less financial discipline than others. If you’re properly disciplined, it’s as easy to save €50 per week as it is to pay off a loan at €50 per week. But hey, horses for courses…..

emeldc wrote: »

They will also lend you up to 3 times your savings. Will the banks?

Dunno. I've always believed that banks judge loans on ability to repay, rather than amount of savings built up.

So for example, if you had €10,000 savings and spent it on car, but then something unexpected happens and you need another €5,000 as well, you could still successfully apply for that €5,000 even though you had no savings left, so long as you can demonstrate ability to repay it properly.
Then again, I could be wrong….