cost of credit union borrowing

Re: Making sense!

AIB/BOI - Interest paid on 8k loan plus interest foregone on 2k savings

CU - Interest paid on 10k loan less interest received on 2k savings.
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One for the bean-counters here: Have I double-counted in the AIB/BOI example above? Is it appropriate to include the interest foregone in the calculation in this case?
 
Re: Making sense!

One for the bean-counters here: Have I double-counted in the AIB/BOI example above? Is it appropriate to include the interest foregone in the calculation in this case?
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Don't believe I qualify as a bean counter, but the interest forgone should be excluded from the calculation. The objective is to compare the cost of a 10k purchase. For AIB/BOI you have used 2k cash and borrowed 8k so the total cost of the purchase in interest terms is the interest on the 8k. For the CU example you borrow 10k, so the interest on 10k is taken, but there is interest received on the 2k on deposit so the total interest cost is the interest paid on the 10k less the interest received on the 2k.
So the net cost in interest of the 10k purchase is:
AIB/BOI: Interest paid on 8k minus interest received on 0 deposit.
Credit Union: Interest paid on 10k minus interest received on 2k deposit.
 
Re: Making sense!

Just while we are on the subject crugers said:
I just did a quick exercise to compare AIB (online calc) and MY CU.
AIB: €8k loan @ 36 mths X €254.48 Interest paid €1161.28
MY CU: €10k @ 36 X €277.78 Interest paid €1368.55
AIB
If I leave my €2k on deposit for 36mths @1.7% (compounded annually) I will receive €103.64 in interest.
AIB cost €1161.28 add €103.64 TOTAL: €1264.92
MY CU cost €1368.55 less interest rec'd €103.64 TOTAL: €1264.91.
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Double counting is present in this example too. The €103.64 should not have been added to the AIB interest charge.
For the 10k purchase made by borrowing 8k from AIB and using 2k cash, the total cost including interest is €11,161.28.
The same purchase using a loan from the credit union will cost €11,264.91.

If you wanted to take the comparison a step further it should reflect the difference in monthly repayments on a 10k and 8k loan.The CU calculation makes a deduction for interest earned on deposit, however the repayments are higher on a 10k loan, and if the borrower took the bank loan option they could place the difference on deposit each month. These monthly deposits, would reach €2,207.27 at the end of the 36 months and would earn interest over the 3 years totaling €56.80 if placed on deposit at crugers CU. There should therefore be a deduction from the AIB interest charge above to reflect this and maintain comparability with the credit union, or possibly more correctly a reduction in the deposit interest adjustment in the CU calculation.
In the above example a borrower taking an 8k loan from AIB and then building up a deposit at crugers CU would be better off by €160.43 than one borrowing 10k from the CU and leaving 2k on deposit.

Sorry if this is a bit of a tangent to the whole debate, but with worked examples in posts calculating interest to the nearest cent, these calculations should probably be made on a consistent basis. Ok maybe I am a bean-counter at heart :)
 
Re: Making sense!

Statler said:
"...and if the borrower took the bank loan option they could place the difference on deposit each month..."

I thought that the whole premise for these calculations was that it was lunacy to have funds on deposit while paying off a loan at a higher rate....
 
Re: Making sense!

In the above example a borrower taking an 8k loan from AIB and then building up a deposit at crugers CU would be better off by €160.43 than one borrowing 10k from the CU and leaving 2k on deposit.

Sorry if this is a bit of a tangent to the whole debate, but with worked examples in posts calculating interest to the nearest cent, these calculations should probably be made on a consistent basis.
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Actually, I think this is the crux of the whole debate, and is not tangential at all. Back to you now, Crugers - It really does appear that the CU is dearer in this case.

I thought that the whole premise for these calculations was that it was lunacy to have funds on deposit while paying off a loan at a higher rate....
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Hi Crugers - Who is moving the goalposts now? ;) Or perhaps we should do a worked example whereby the extra funds are paid off the AIB/BOI loan early, thus reducing the interest charges and thereby increasing the gap between the AIB/BOI cost and the CU cost?
 
Re: Making sense!

Or perhaps we should do a worked example whereby the extra funds are paid off the AIB/BOI loan early
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A rough calculation shows that, if repayments on the 8k loan were upped to the level needed for the 10k loan, it would be paid off almost 8 months earlier. Total interest would be €908.82, making it €356.09 cheaper.
 
Re: apr

Any shares in a members account, below the level of any loan balance, are locked in and cannot be withdrawn. Therefore the level of shares must be at least equal to the level of any loan balance.
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I think they are trying to say that; at approval stage, the shares in the account are frozen at that level. To withdraw from that acc. the loan balance must drop below the level of shares. To get around this, CUs offer a "slash 1" acc. which can be used as normal , away from the main acc. There are no charges or fees for maintaining this additional acc. and it operates under the same member(acc. no.). Experienced CU staff will explain this when you are taking out the loan.

What people here seem to be suggesting is that no borrower should maintain a cash savings balance while they have a loan out. I disagree and see no real problem in having a cash balance while borrowing a larger sum. In an emergency, you will find your CU a lot easier to get your savings out of than it would be to borrow additional funds from a bank. In addition, you can lock your funds away fro 3/5 yrs DIRT exempt and use this as security against a loan.

CUs are not bound by law to publish APRs but soon will be. As part of our CU's drive to encourage more loans, I attempted to work out APRs and asked friends in the industry and other learned people. Either they did not know or the methods were varied. I worked out a rough method of multiplying by 1.05 and that seemed near enough.

I am intrigued by the formula proposed here but do not accept it as it plays straight into the hands of the ABCUs who populate this site and disregards all the positives which were articulated in the quote(and there are more) from a CU reproduced above.

I will repeat what I said many times here - if it suits you well and good, if not shop around. Price is not the only determinant of good value.

Slim 8)
 
Re: apr

it plays straight into the hands of the ABCUs who populate this site
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That's a cheap and misdirected shot. I'm arguing for greater transparency and openness for CU's, so that their members can easily compare the deal they are getting from the CU with deals available from other sources. Yes, there are many other benefits of CU's - but the current situation allows CU's to present a warm, fuzzy picture to members where there is no actual value of these other benefits quantified.

I am most definitely not an ABCU - I just want to ensure greater clarity and openness.
 
Re: apr

Yes - cheap shot. As already point out at least two people with some reservations about the cost of borrowing from CUs (myself and Brendan) are members of our respective CUs and, as such, in no way "ABCUs"! Where the terms & conditions of dealing with the CU are clear and they offer better value for money than alternative institutions to their members (part of their raison d'etre I would have thought) then I (and Brendan I'm sure) would be happy for people to avail of their services. However if the terms & conditions are unclear (in spite of assurance to the contrary) and/or they are not competitive compared to other institutions then it is fair to warn people.
 
Re: apr

No offence intended. What I was saying was that acceptance of the formula is to accept that the security requirement should in some way be reflected in the APR. This thread and general discussion has been going on for months and seems that it's going around in circles. The really "cheap shot" was Brendan's use of the "myth" to have a go at credit unions.

Slim 8)
 
Re: apr

What I was saying was that acceptance of the formula is to accept that the security requirement should in some way be reflected in the APR.
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Why should it not be included in the APR, given that the APR is designed to allow consumers to compare competing offerings?
 
Re: apr

Slim

I am not having a go at credit unions. I am having a go at their expensive lending practices and their practice of misleading customers.

Read back at the contributions of people to this thread. CU borrowers are hanging on to the belief that they are borrowing cheaply. We cannot shake that belief with the facts. To me that is what a myth is. Something which is not true which people believe in strongly.

Brendan
 
Re: apr & CUs

their expensive lending practices and their practice of misleading customers.
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You see, Brendan, it's not that I am arguing that the requirement to retain shares as security does not increase the real cost of borrowing, it's the tone of the comment. Your words quoted above give an impression of deliberately misleading lending practices and a deliberate attempt to mislead their members(not customers). The positives of borrowing from CUs have been listed above by me and others. I accept there is a cost associated with this type of borrowing and it is not suitable in every case but I think it is harsh to accuse us of misleading members. Most people should keep a bit of cash, preferably in a DIRT free account, for emergency situations. If IFSRA decide that CUs must factor this into their APRs when they must publish APRs, then someone will undoubtedly give us the correct formula for calculating same.

CUs "Putting People First",

slim 8)
 
Re: apr & CUs

Most people should keep a bit of cash, preferably in a DIRT free account, for emergency situations.
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DIRT free accounts lock up money for a minimum of three to five years - hardly suitable for an emergency fund.

[broken link removed]

Like the whole APR versus "CU way of calculating interest" issue perhaps another example of the type of non deliberate misleading information propagated by some CUs? ;)
 
Re: apr & CUs

Hi Slim - I think you are getting a bit defensive. Ignore the tone of the comment just for the sake of arguement and look at the facts.

The compulsory saving requirement with CU loans means that these are expensive loans. Surely it is in the direct interest of the members that this expense be visible & transparent? If the CU truly is 'putting people first', then surely it wants those people to get the best value service?

I appreciate that there may be other benefits that come with this higher price - and if the CU's want to call this out & compete on a level playing field (e.g. take our 9% APR loan to get life insurance and participate in your community), then that is fine. But when CU's claim to offer their members best value but actually end up being dearer than the average high street bank, then there is a problem that needs to be addressed.

And surely the angle of using the compulsory savings as your 'rainy day' (no pun intended) money doesn't make sense, as you won't be able to withdraw this money when you need it, unless the loan has cleared.
 
Re: apr & CUs

hi lads. i've actually stood back from the flack in this debate
deliberately - i think i've already expressed my opinions
about credit union lending policies and don't really have
anything new to add. but i am still interested in calculating
a true apr of credit union loans.

some seem to be suggesting that apr is not a good measure
for expressing the cost of borrowing or that it is "just a
statistic". i'd prefer to farm off such a discussion to a
different thread. let us accept that it is the only universally
accepted measure of credit cost. go to any personal finance
site on the internet and you'll find apr used to compare the
cost of credit. let's just say that if you believe that apr is not
relevent to comparing the loan costs , you're in a tiny
flat-earth like minority.

slim, you object to including the cost of the "security
requirment" in the apr figure. i don't think this is reasonable
as it is requirement for securing the loan and so is part of the
cost of the loan. if it were optional i would agree. even at
that i believe the credit unions will in many cases offer better
deals than banks.

i think the formula i initially gave is errouneous because i
made some false assumptions. i assumed that the borrower
could decrease the balance of their savings as their loan
balance decreased but it seams this isn't the case? from
what i gather from the above, if you borrow 10k having put
2k on deposit, you must leave the 2k there until the loan
balance is down to 2k? is this the case? what happens then?
can you then use the 2k to pay off the balance? what about
the interest earned on the 2k, does that have left in the
savings account?
 
Re: Credit Unions and APR

A couple of points here. Yes, I sound defensive but that is because I think CUs are getting a bashing they don't deserve.

With regard to the access to emergency funds, you can access your DIRT free Special Term Accs. at least once without penalty and thereafter, if it really is an emergency, you can terminate it and pay the penalty.

With regard to the security requirement, in fact this was removed by the Credit Union Act of 1997. Prior to that, any credit union might implement varying types of ratio, 25%, 30% etc and reduce this as borrowers gain a successful record. In addition any shares on deposit at the time the loan was applied for were frozen at that level and could not be accessed without the loan balance being lower than the shares or special permission of the board.

Nowadays, the ratio requirement is no longer in force as a rule but may be applied at the discretion of individual CUs, perhaps in the case of new members. The reality is that lending decisions are made on the basis of ability to pay and good record as a borrower (with the CU) previously. we have loans for thousands out to members who have only a few hundred in the account. If an emergency arose, we would allow that member to reduce the funds to the minimum allowable. There are over 530 CUs in the country and each may apply a variation on this practice. If a formula was created which would allow each CU to calculate its own APR according to the lending policy it uses, that might be one way of having a meaningful APR, but it would be difficult to factor in members' record of borrowing etc.

In relation to APR, I think its usefulness is much overrated. look at how many examples of quoted APRs not matching in terms of repayments per month. Many financial writers say not to look at the APR but at the amount payable per month. On that score many CUs are cheaper than the mainstream lenders and with very minimal security requirements.

At the end of the day, the scenario may differ from CU to CU depending on where you live. A loan rate of 5.5% or so was attributed on this site to ASTI CU but that is where the member's shares at least equal the loan amount. Where the loan amount is greater the rate is closer to 8%.

Perhaps the forthcoming voluntary adoption by CUs of aspects of the Consumer Credit Directive will push things in this direction.

Slim 8)
 
Re: Re:Re: Making sense!

Anyone with access to banking facilities would not need an emergency fund. So if you can get a bank overdraft or a Credit Union loan, you won't need to keep money on deposit.

I will say it again - Credit Unions have their place in society and some people could not get by without them. But having said that, everytime I have phoned them, they have misled me about the true cost of the loan. The members actually believe that they are cheap, when the opposite is the case. They are very dear compared to the banks.

It's not easy to say that in a neutral, factual tone. The facts bash the Credit Unions. Their misleading information also bashes them.

Brendan
 
Making sense

Hi Brendan
You say:
"...it does seem that ASTI (CU) will be a very good deal..." (19/03/04), and then say "... They (CU's) are very dear compared to the banks..." (23/03/04).

Would you agree that facts are that SOME CU's are good value, some are better value than most banks, SOME CU's are not as good as SOME banks and possibly SOME CU's are more expensive than most banks?
 
Re: Re:Re: Making sense!

I think the best summary is as follows:

Credit Unions are expensive places to borrow from when compared to banks, but some credit unions may be cheaper.

As a general rule, it's probably better for people to avoid the Credit Unions if the banks will give them the money. If they are a secondary school teacher or a resident of Lahinch, they might save by going to the Credit Union instead of the bank. but lots of people will check their local credit union and be misled by the Credit Union advertising and end up paying more than they should do.

Brendan
 
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