Credit Unions: 'cutting the cost of borrowing'?

Milarky · 16 April 2006 at 11:59PM

This one slipped me by until I stumbled across it:

ABCUL welcomes rise in interest rate cap - 07 Dec 05

http://www.abcul.org/page/news.cfm#260

Credit unions will be able to charge up to 2% a month on the reducing balance of a loan, an increase on the previous statutory limit of 1% a month.

That's also a doubling of the permitted interest rate - from 12.7% to 26.8% - but they don't lay that on so thickly...

Many within the movement and a number of commentators believe that this flexibility will enable more credit unions to more flexibly provide..

..a bit of circular statement there..

...the sort of small, short term loans for which many people currently pay interest rates as high as 180% from doorstep lenders. The rise may allow more credit unions to change their loan policies...

(and then again.. it may not. That's entirely up to them. But they have had their potential income doubled, by this change haven't they? Nice one, Cyril.)

...to allow people to borrow before they have built up their savings, and some may trial doorstep collections to tempt more people to much lower cost credit.

'Doorstep collections'!

ABCUL CEO Mark Lyonette said: “This increased flexibility will give credit unions more options when they are looking at providing the products that people in their communities need..."

..as Mandy Rice Davies once famously said..

"Even at the new ceiling of 2% a month on the decreasing balance, a credit union loan for £200 over 6 months will still cost less than £14 in interest, an increase of less than 30p a week on the current maximum costs..."

Oh, so that's alright then: "It hardly costs you anything more - pennies a week - and we're virtually giving you a 'free' loan. Just be grateful for that oik!"

"But the rise doesn’t mean that the cost of all credit union loans will rise, and I’m sure that most loans will remain at or below the current ceiling of 1% a month."

Yes outstanding loans would be capped for their term, of course, and who's going to borrow at 2% a month once they have managed to pay off a loan at a whithering 1% already? They'll be taking their money out of the CU, won't they?

“The increased costs to consumers will be minimal but credit unions will now have more flexibility within their business planning to make sure they’re reaching more people who can most benefit from the affordable credit they provide.”

As a general comment: This is entirely self-serving. CUs should have had nothing to do with this move - let alone have lobbied for it. Are they 'soft'. Do they think they can possibly defend a top rate of 2 percent per month? As a bit of context - not provided by the ABCUL properganda above - the old limit of 1% - which is now deemed 'unworkable' - dates from 1979. Does anyone remember what inflation was like then - or what the 'bank rate' was? Yet we have bank rates of 4.5% (near 50 year lows) mortgages well under 10 percent and even credit cards charging much less than 2% per month whilst being attacked for their greed by the Labour luvvies of the Treasury Select Committee - and the best that these chanpaigne socialists can come up with to combat 'financial exclusion' is a doubling of the rate which these bodies can charge their own impoverished borrowing members..

Zippy123 · 17 April 2006 at 10:16AM

Rates should be set according to risk.

The perception is that credit unions sell to higher risk borrowers and need to have a higher interest rate to compensate.

If 100 loans are made for £100 that is £10,000. if 10% default then the cost is £1,000 in loan terms only (no extra admin etc included). The interest rate needs to reflect this plus the savings rate they give to their investors (say 5%) and any overheads. If they were commercial then they would add profit as well.

So based on the above a rate of say 16% a year would not be unaccepatable based on the risk profile of their borrowers. Remember banks may not lend to this group of borrowers anyway.

The Credit Unions need to offer attractive rates of interest to their depositors or they will not have any money to lend.

Milarky · 17 April 2006 at 2:28PM

Rates should be set according to risk.

Weren't they in the past then? Wasn't lending as 'risky' in 1979 as it is today depsite inflation being much higher than it is today and commercial rates of interest being much higher also? How did CUs manage to 'survive' up to the present if they had to come through all that harsh ecomonic woe only to arrive in the benign ecomonic conditions we now enjoy and then have the cheek to claim that they need this 'flexibilty'? You'll note that he said he thought that: "most loans will remain at or below the current ceiling".

The Credit Unions need to offer attractive rates of interest to their depositors or they will not have any money to lend.

Too true. In my area it's: "borrow at 2 percent - lend at 12". That's profiteering from where I am standing. It is obvious to me that CUs are just not trying to please either their borrowers or their savers and that they hide behind the mask of being 'owned by their members' because it suits them to ellide responsilbity for their own poor performance.

As to the points about the likelihood of default affecting the pricing - that's all wrong in my view. It's because of the lack of abilty to cross susidize from the large pool of savers to the relatively small pool of 'risky' borrowers that this becomes the fallback. My point: Why should one 'poor' person - who's willing and able and conscientious about repaying their £100 loan in full and on time be the one to subsidize the risk of another poor person via a much higher rate of interest? I don't think they should. And I don't think CUs should go that way.

There's also something very sus about arbitrarily raising the 'cap' from 1% per month straight to 2% with nothing in between. This was just 'given' to CUs at a stroke of the Chancellor's pen. Either that 1% cap was arbitrary and well past it's sell by date (but then you didn't see any CU job losses did you?) or else there really was nothing unsustainable about the old cap and - if anything - restrictions rather than relaxations should have been considered in light of the much greater availabilty of 'commercial' lending at lower rates than twenty five years ago.

Zippy123 · 17 April 2006 at 3:25PM

Simple really. If you do not like the rate being offered do not borrow the money and save for what you want before hand.

ADC_3 · 15 August 2006 at 4:20PM

Never thought I'd say that but looks like it's happening.

I was the chairman of the board of directors of a Council Credit Union which started in 1995 and prospered. It had thousands of members and millions of pounds in assets when I left a few years ago as my job changed. In all that time I was proud that we lent to people with low incomes at a rate of 1% per month on the decreasing balance which works out at 12%. (People with higher incomes could look around for cheaper credit)

Recently I looked at their website for the first time in years and noticed that they now have a variable rate of interest going up to 26% APR. What's worse however is that the smaller the amount borrowed the higher the interest rate so poorer people were being penalised. Richer members wanting larger loans could still enjoy the low rates.

I'm appalled. If I'd have still been chairing the monthly board meeting when this was proposed I'd have made it a resigning issue. All it will do is alienate the poorer members of the CU who will return to doorstop lenders.

Shame on you the Credit Union movement.

Credit Unions: 'cutting the cost of borrowing'?

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