Is this really bad advice from Credit Union?

AndrewJRenko

PhilOssophy wrote: »

But he paid €300 interest when he didn't have to!

That's true, though at least, he understood what he was paying and why.

I'm not sure the same can be said for most CU borrowers.

anewme

loyatemu wrote: »

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.

You can, I had something like 300 euro in shares and they gave me 40,000.

emeldc

anewme wrote: »

You can, I had something like 300 euro in shares and they gave me 40,000.

Now that's more like it :D

anewme

emeldc wrote: »

Now that's more like it :D

Not when you've to pay it back!:D

Dodge

AndrewJRenko wrote: »

That's true, though at least, he understood what he was paying and why.

I'm not sure the same can be said for most CU borrowers.

That’s unfair IMO

They have to tell someone the total cost of the loan (inc interest). They’re pretty up front of it IMO experience and people who take out the loans understand the cost

I don’t think people who borrow from CUs are any different from those who borrow from banks. I’d wager the banks lose more on distressed loans than the credit unions too

Stratvs

Back in the 80's when we were starting off, we opened a CU account and put what we could away. We dipped in and out and borrowed for car changes etc. At that time you could borrow at max 3x your savings. It was always the case that you couldn't bring your savings below the level of a loan. The idea really was that most people wouldn't replace savings if they used them but if the savings were maintained they'd pay back a loan and the interest was worth it when you still had savings. Also the argument was that the real cost of funds was only the difference between interest charged and dividends earned.

Credit Unions have had an important role in Ireland. They helped many people get to Italia '90 and USA '94 . We still have our CU accounts but rising deposits mean dividends are almost non-existent after Central Bank requirements are met. Many Credit Unions are capping member savings for that reason.

Their business model may need serious change if they are to remain a competitive banking option going forward. However for the small borrower they do provide a stress free and friendly option.

phormium

Try applying to a bank so with a bad credit report! Computer will say no immediately and an actual human being in the bank will have no say and it will be a minor miracle if that decision is overturned regardless of why you have a bad credit report.

On the other hand you will get a hearing from the Credit Union even if the initial credit rating computer inquiry indicates a 'no' answer. As the decisions will be made in house then the credit committee can discuss the loan and decide if there are extenuating circumstances

While no doubt there is a similarity and crossover with customers of banks and credit unions I think there is definitely a certain amount of CUs borrowers who are not bank customers at all.

CIARAN_BOYLE

OK I think it's essential to distinguish between loan products here.

The op appears to have started a thread to condemn a certain practice (secured loans within shares) and people seem to be coming in on all sides to judge or praise credit unions.

So for thos ewho haven't got it let me explain the loan within shares

X has a savings account with €35,000. His credit union provides a dividend on shares of 0%.

He wants to renovate his house (€30,000). He asks the tellar to make an appointment so he can withdraw the money.

Teller suggests instead that he keeps his shares and instead takes out a €30,000 loan at 6% over 5 years. That way he can have all his savings untouched.

The loan is secured on his savings so he won't be able to bring his savings below the outstanding amount of the loan.

X decides that sounds great so instead of using his savings he instead pays roughly €5,000 over 5 years in interest for a loan that's borrowing less that he held in savings.

This is terrible for him but great for the credit union (risk free loan).

If you treat the credit union like a bank and borrow when it makes sense to you to do so a credit union is great but please don't let them just make an idiot of you with these fully secured loans within shares crap.

Uncle Pierre

CIARAN_BOYLE wrote: »

The op appears to have started a thread to condemn a certain practice (secured loans within shares)

Ammm...if I was condemning anything, it wasn't necessarily that type of loan itself, but rather what I considered to be the irresponsible practice of encouraging people to take out one of those loans in circumstances that would make even less sense than usual. Yes, I had a certain opinion myself...was just wondering how many people might share it.

CIARAN_BOYLE wrote: »

please don't let them just make an idiot of you with these fully secured loans within shares crap.

And I can tell from this statement that you share my opinion yourself!

Donn Cuailnge

HerrKuehn wrote: »

Borrowing from your own money at 5.5% is the bit that I find idiotic. The money is not accessible to you during that time, so it cant be used for emergencies. It seems to me that the people who are doing this are the ones that can least afford to give away a few hundred euros.

The balance of your loan is not accessible, but if a larger loan is needed, you are more lightly to obtain it.
I can go in to my CU 6 days of week. I find it a very useful for turning around loan application quickly at a competitive rate.

PhilOssophy wrote: »

Did somebody in the CU advise you that that loan would be easier to get with savings?

All these institutions are more concerned with a pattern of saving (e.g. if you are putting €x hundred aside every month) than the exact amount you have saved, especially if you can say "I had 5k saved and had to change the car and am now back to zero but I'm still putting €200 a month aside" rather than them seeing you adding €300 interest into the CU pocket when you didn't have to.

How good is your pattern of savings if you are consistently returning your balance to zero or close to it?

PhilOssophy wrote: »

People talking about credit rating is BS. Banks care about 3 things
1. How much have you on deposit
2. How consistent are your monthly savings
3. How long have you been consistent at number 2 for.

There is very little else matters on your credit risk and if a Credit Union etc tells you otherwise they are lying to you.

Your credit history has a huge bearing on wether or not a financial institution will give you a loan and what APR you can obtain a loan at.
https://www.ccpc.ie/consumers/money/loans/your-credit-history/

AndrewJRenko wrote: »

This is an interesting case study, and shows that these loans can work for some people. You understand how interest works, but I suspect a lot of others don't really get the impact of this.

My main concern about these loans is that the quoted APR is understated, as it doesn't take account the need to keep additional funds on deposit for the lifetime of the loan. This really means that you're actually borrowing less, so you're paying higher interest on the net balance.

I'm all in favour of co-operative institutions, but very few Irish credit unions are truly cooperative. The AGM is a ritualistic set piece, with little input from members. There is no facility for members to submit motions, as was the case with building societies. And practices like this understatement of APR are not in the member's best interest at all.

The board are elected at the AGM. It is one member one vote. It is a lot more democratic than a bank.
Decisions get made by those who show.

Wildly Boaring wrote: »

So your savings were locked in to get the secured loan?
If you wanted them you couldn't have them??
You think that's still your money???

You just paid €300 to borrow your own money from yourself
Oh and you used SPARE money to clear it quicker even though you have the savings (ie SPARE) in the first place.

Christ on a bike

What would you have me do?
Where do I get credit quickly at a competitive rate? When I have little to no saving, no history of paying back loans
A pay day loan?

Donn Cuailnge

Uncle Pierre wrote: »

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.

The reasons given to take out a loan like this in this email are really awful.

Are you quoting the email or giving the general gist.

Because if you are quoting it verbatim, I would email a complaint in relation to it

Jim2007

PhilOssophy wrote: »

People talking about credit rating is BS. Banks care about 3 things
1. How much have you on deposit
2. How consistent are your monthly savings
3. How long have you been consistent at number 2 for.

There is very little else matters on your credit risk and if a Credit Union etc tells you otherwise they are lying to you.

Right because some random individual on the internet is more believable....

PhilOssophy

Jim2007 wrote: »

Right because some random individual on the internet is more believable....

OK well you stick to the advice of your Ole Pal Gill in the Credit Union if you want!

PhilOssophy

Donn Cuailnge wrote:

How good is your pattern of savings if you are consistently returning your balance to zero or close to it?

Banks couldn't care less if you don't have a fiver on pay day once you have saved enough in the month. Don't let anyone convince you otherwise!

Donn Cuailnge wrote:

Your credit history has a huge bearing on wether or not a financial institution will give you a loan and what APR you can obtain a loan at.
https://www.ccpc.ie/consumers/money/loans/your-credit-history/

Where on there does it say that having more/previous loans is better for your credit history?

Uncle Pierre

Donn Cuailnge wrote: »

The reasons given to take out a loan like this in this email are really awful.

Are you quoting the email or giving the general gist.

Because if you are quoting it verbatim, I would email a complaint in relation to it

The bits in bold italics are direct quotes from the mail. That's even why I felt the need to put the note about "ignore the bad English". I wouldn't write that way myself!

I was actually on the verge of mailing them about it when I decided to post about it here instead, to gauge other people's opinions and see if I might be over-reacting. It's been an interesting discussion.

Henry Ford III

In my view day to day expenses - motor insurance etc. should be paid for from your income. They are "revenue" costs.

A new car might be financed over a period, although ideally not. It's a very poor investment.

Buying a house is strictly capital and a mortgage should be used to fund it if needs be.

Advising customers to borrow for a long period to pay for day to day expenses can't be a good idea, particularly if you have cash already deposited which would be put at risk by doing so.

The C.U. seem to be promoting safe loans, whilst protecting their deposits.

AndrewJRenko

Dodge wrote: »

That’s unfair IMO

They have to tell someone the total cost of the loan (inc interest). They’re pretty up front of it IMO experience and people who take out the loans understand the cost

I don’t think people who borrow from CUs are any different from those who borrow from banks. I’d wager the banks lose more on distressed loans than the credit unions too

I'm not sure that they really do provide the total cost of the loan, as they don't take the requirement to keep shares on deposit into the APR calculation.

Donn Cuailnge wrote: »

The board are elected at the AGM. It is one member one vote. It is a lot more democratic than a bank.
Decisions get made by those who show.

While technically correct, this doesn't make it a democratic organisation.

At my recent AGM, there were four nominations for four board vacancies. It has all the hallmarks of set up between a cosy club.

In fairness, I know these club members are volunteers, and don't get much back for the time they put into it. They do get expenses, in some cases a laptop or tablet, and the occasional junket to a conference.

But there is no mechanism for members to submit a motion for the AGM, for example.

Wildly Boaring

Donn Cuailnge wrote: »

What would you have me do?
Where do I get credit quickly at a competitive rate? When I have little to no saving, no history of paying back loans
A pay day loan?

The whole context is that you have the money say 5k. But take out a 5k loan to purchase a car. The CU insist your 5k sits in your account whilst you pay them back the 5k plus €300 interest. That's the context.

So no payday loan.

You're paying to take a loan of your own money.

It's mad.
"But sure aren't the CU great they open 6 days a week and approve anyone who comes in."

Fuvkin sure they do if it's secured against their savings.

Wildly Boaring

AndrewJRenko wrote: »

In fairness, I know these club members are volunteers, and don't get much back for the time they put into it. They do get expenses, in some cases a laptop or tablet, and the occasional junket to a conference.

.

They get nothing back.
Exposes are just that, vouched expenses.
A laptop to use for the role and return on leaving. That's not a perk, it's a tool

Jim2007

Wildly Boaring wrote: »

It's mad.
"But sure aren't the CU great they open 6 days a week and approve anyone who comes in."

Fuvkin sure they do if it's secured against their savings.

It's not mad at all, you just have a lot to learn about human nature. It is fact that many people are much better at paying off a loan, than saving money. This way they get whatever they wanted to buy, pay of the loan and still have their savings.


Madness is continuing to promote financial advice that while logically correct fails because human nature makes it so:


- In the last recession Irish house holders lost more in wealth that any other part of the EU... because they where heavily invested in a high risk asset, but we're promoting the idea.



- The purchasing power parity adjusted wealth of an average US citizen on retirement is about 20k while the average Swiss has 400k. The US has self directed pensions, the Swiss have mandatory pensions, yet we continue to pomote self directed pensions as being the solution to the pension crisis in Europe.


That is real madness - telling people to follow financial advice, we know they are not capable of executing.

AndrewJRenko

AndrewJRenko wrote: »

I'm not sure that they really do provide the total cost of the loan, as they don't take the requirement to keep shares on deposit into the APR calculation.
.

Having money on deposit does not increase the cost of the loan, I’m not sure how you claim the apr is inaccurate because of this?

AndrewJRenko

Wildly Boaring wrote: »

They get nothing back.
Exposes are just that, vouched expenses.
A laptop to use for the role and return on leaving. That's not a perk, it's a tool

If you are consistently getting mileage at public sector rates, without having to apply the standard public sector restriction of 'public transport where possible', you'll get a few quid out of it.

My local CU, Capital, has Director's expenses of €5,366 for 2019, up from €828 in 2018, which is a fair old jump.

Sophia Tinkling Orangutan wrote: »

Having money on deposit does not increase the cost of the loan, I’m not sure how you claim the apr is inaccurate because of this?

Yes, it does. Let's say you are borrowing €5k, and you are required to leave €3k on deposit with them.

The net result is that you're really borrowing €2k, but you're paying interest on €5k. They calculate the APR based on a loan of €5k, but it should really be calculated based on a loan of €2k.

If you're comparing the APR to a bank loan of €5k, it is misleading.

AndrewJRenko

AndrewJRenko wrote: »

If you're comparing the APR to a bank loan of €5k, it is misleading.

It’s not misleading, your way of looking at it is incorrect.

You are borrowing 5k, it’s just secured against your savings. You are still borrowing 5k though and so should be paying the apr on the 5k same as a 5k bank loan.

It’s not different to putting up something else as collateral in a bank loan.

HerrKuehn

Sophia Tinkling Orangutan wrote: »

It’s not misleading, your way of looking at it is incorrect.

You are borrowing 5k, it’s just secured against your savings. You are still borrowing 5k though and so should be paying the apr on the 5k same as a 5k bank loan.

It’s not different to putting up something else as collateral in a bank loan.

You don't have access to the 5k you are using as collateral though. If you were using say a house as collateral you would be able to live in the house. Using your own 5k as security to borrow 5k is beyond silly.

HerrKuehn

HerrKuehn wrote: »

You don't have access to the 5k you are using as collateral though. If you were using say a house as collateral you would be able to live in the house. Using your own 5k as security to borrow 5k is beyond silly.

As explained earlier it’s not silly. I’ve done it and I think it’s a good idea in certain situations, I was able to leave all my savings (that I had in the credit) intact and borrow a for a small interest rate instead of using them up.

HerrKuehn

Sophia Tinkling Orangutan wrote: »

As explained earlier it’s not silly. I’ve done it and I think it’s a good idea in certain situations, I was able to leave all my savings (that I had in the credit) intact and borrow a for a small interest rate instead of using them up.

But you are using your savings up if you do this. You are taking your 5k out, spending it and re-saving the 5k. You are also paying 5% interest on the amount remaining until you get to your savings goal of 5k.

AndrewJRenko

Sophia Tinkling Orangutan wrote: »

It’s not misleading, your way of looking at it is incorrect.

You are borrowing 5k, it’s just secured against your savings. You are still borrowing 5k though and so should be paying the apr on the 5k same as a 5k bank loan.

It’s not different to putting up something else as collateral in a bank loan.

Your accountant says different. The CU is out of pocket for €2k. That's the money they have lent.

Either way, you can't compare APRs if one lender has particular conditions that other lenders don't. No-one really does collateral for loans of this size, so it's a bit of a red herring.

HerrKuehn

HerrKuehn wrote: »

But you are using your savings up if you do this. You are taking your 5k out, spending it and re-saving the 5k. You are also paying 5% interest on the amount remaining until you get to your savings goal of 5k.

Most people will find it easier to repay a loan than to save as you have no choice with the loan.

Also in some situations a history of raiding your savings will not look good for instance if saving for a house deposit.

Uncle Pierre

Well, this has certainly turned out to be a round-in-circles debate about the merits (or otherwise) of secured loans in general.

All I intended when starting the thread was to ask that no matter how people feel in general about them, is it or is it not irresponsible for a financial institution to put out the idea of taking out a five-year loan to pay an annual expense?

DaveyDave

Please tell me people don't actually get loans out so they aren't touching their savings?