Loans secured by savings

[24601]

I've come across this in my local CU where one can get a preferential interest rate by securing the full value of the loan with savings. I can understand the logic somewhat for people who find it easier to make loan repayments than save, and I understand the desire to not impact on insurance coverage, but what are the benefits of these types of loan? I think the secured rate is 5%APR and the standard rate is circa 10%. They require between 10 and 25% of the value of the loan secured by savings for the standard rate loan in any case and don't offer any interest rate discount for loans secured by 50% savings - seems a bit peculiar.

So why wouldn't someone just make a withdrawal rather than paying interest for the privilege of borrowing your own money? Am I missing something?

 

[Monbretia]

Because as you say in your own explanation some people prefer the structure of making loan repayments which they will do when they might not have saved the same amount.

They also like the idea that they still have savings if needs be, how many people still maintain overdrafts, credit card balances, small high interest loans like car loans when they have sufficient savings to pay them off but they don't, it's a particular mindset and it has some merit if the discipline of paying back a loan is the only way to ensure the excess income is not flittered away.

 

[Gerry Canning]

24601.

Seems a bit convoluted alright but the explanation I got from local CU was this.

Customer borrows 1000 whilst having 500 savings.
Customer pays off the 1000 whilst not touching the 500 savings.

So when customer has loan paid off they are 500 (ahead) and can put the loan repayment amount to savings , so next time they require funds they don,t need to borrow.

Nice idea , and given the amount Cu,s have on deposit ,it seems to work.

Its a far cry from Mr Bank, who stretch peoples finances to the limit

 

[Slim]

I can understand the logic somewhat for people who find it easier to make loan repayments than save, and I understand the desire to not impact on insurance coverage, but what are the benefits of these types of loan?

I think you have answered your own question in this sentence. The insurance is more significant as a member reaches 55 and passes it. Also, from the CU perspective, it keeps capital in.