Your views on the Credit Union.

jizba

I've heard a little bit about this establishment over the past number of moths but I am unsure as to what its benefits are when it comes to borrowing and saving.

I have around £5000 that I want to invest until around October, at which time I was planning to take out a loan of up to around £20,000. Is the Credit Union my best bet for this or are there other institutions better equiped for this?

Milarky

Avoid credit unions. They are the pits I am afraid (speaking from personal experience) Also I don't like the new regulation they are operating under which allows them to charge borrowers up to 2% per month instead of the previous cap of 1% a month. Savers are not guaranteed any interest (ie rates are low compared to elsewhere) In other words there are more deserving and efficiently run charities if you just want to donate the interest - which is effectively what you do as a saver with a CU.

Ian_W

For communities/groups who don't have access or are likely to be turned down by mainstream banks or lenders CU's can offer a very helpful and cheaper alternative to the "shoppa-check" or loan shark alternatives. However if you don't fall into that category then like Milarky, and again from personal experience, I would avoid.

The CU I was a member of which was employment based were paying 4.3% on savings as against market leading rates of 5.7 or 5.8%. Their loans were 9.9% whereas loans were available to me on the open market at <7%.

Ask the CU you are considering what their dividend was last year and compare it to current savings rates of around 6%. Then find out the loan cost from them and have a look at the best buys currently available HERE.
CU loans do include life cover but if you don't need or want it you can't exclude it with them whereas it isn't compulsory with other lenders.

CU's are moneysaving for some but not for most, IMHO.

quinlanmd

That's a bit harsh. Much depends on the size of the credit union is and how efficiently it is run.

The dividend is highly likely to be lower than the interest rate you would receive with a bank or building society. Savers in credit unions tend either to be philanthropic (accepting a lower interest rate on their savings in the knowledge that those in need will be able to borrow from the credit union at reasonable rates of interest) or those seeking to borrow from the credit union either now or in the future.

Milarky

Credit Unions used to be able to get along at the capped rate of 12% - that was until Gordon Brown took over. Two years ago he raised (under pressure from ABCUL - the trade body) that cap to 24% pa. At a stroke CUs could double their profits without lifting a finger. That was immoral and stupid. That cap has been there since 1979 I believe - all though the higher (if not the highest) periods of inflation when commercial lending rates were commensurately higher than today. So why, when we are in the era of all time low rates (lending and saving) did this have to happen?

I think the logic was to put two ill-assorted groups together: The existing CUs with their work-based cloth cap self help image and the untermenchen or financially excluded in the buzz. People whom even the banks would not lend to could be helped if CUs could charge a bit more.

I don't think this will ever work - cementing in place financial exclusion by raising the cost of borrowing from the savings co-op.

I am sure there are many alternatives to just making dearer to borrow through these organisatrions - which are let me stress supposed to be associations of like minded folks rather than mini banks. They can't grow up to be something different so it is no business of the government to be doing ABCULs bidding in this way.

One alternative (I'm sure it could work) is to approach a large organisation like the Nationwide and ask them to create a product whereby they pay specifically lower rates and the any money held under such accounts is use it for specific social-type lending. The clever part is the linkage. If £10 million is paid into these accounts then that £10 million forms the basis of these 'affordable' loans. In the process the loan rate is as low as practical and the people considered eligible don't need to be savers - one of blind spots of a CU IMO.

The interest rate could be 1- 1.5% below the comparable product and I think some people (maybe enough) would be interested in putting at least some of their savings that way. However a difficulty is in how quickly all the money could be withdrawn. For that reason 'bonds' seem a better bet than just paying a lower rate of interest on instant-access accounts. In time, however, if a critical mass of settled deposits had built up they could open it up to more basic products. With 11 million customers (and a lot of PR at stake) they could do worse than by asking for minimal subscriptions of capital from all members to kick start things.

Now why should a Megalith like the NW get involved in charidy work at all when it's a bank? Well why can't it? is my reply. It just seems more straight laced to me than using ill considered changes affecting the CUs

quinlanmd

I don't necessarily disagree with Megalith's view, and the alternative suggested is sensible (although the problems with getting financial institutions to provide basic bank accounts in a proper and convenient manner to customers that need them suggest that any attempt to introduce this type of social lending would need strong regulation).

Another view might be that for credit unions to grow, they need to be more attractive to savers. Increasing the maximum lending rate that credit unions can charge allows them to expand both their savings and loan books (increasing dividends to savers -> increasing their deposit base -> increasing the funds available to lend). I confess that I don't know the statistics, but I would be surprised if many credit unions have increased their lending rates to anywhere near the new maximum level (but also most are not paying competitive dividend rates to savers).

However, I also don't think the credit union model will work in its current form. Whilst there are some large credit unions that are working very well, most are too small and inefficient to operate effectively in the longer term. My local credit union, for example, has to my knowledge only a few hundred members and is supported by grants through the government's New Deal for Communities scheme. Without grants, I suspect it would have to merge with a larger (borough-wide) credit union, diluting further the "common bond" which is supposed to be at the core of these bodies.

Compound_2

As mutuals, do credit unions, like building societies, offer the potential for a windfall? I’m not sure what the voting rules are (like £100 at building societies). It may be hard finding a credit union you can join because membership is open only to a small group. CUs are risky investments because some have become insolvent, invoking the FSCS.

jizba

Thanks for the feedback. My main aim is not necessarily short term savings but a long term loan, is the CU a good option in this sort of situation?

baby_boomer

Compound wrote: »

As mutuals, do credit unions, like building societies, offer the potential for a windfall?

No. For the reasons stated above by quinlanmd.

quinlanmd wrote: »

Savers in credit unions tend either to be philanthropic (accepting a lower interest rate on their savings in the knowledge that those in need will be able to borrow from the credit union at reasonable rates of interest) or those seeking to borrow from the credit union either now or in the future.

Credit Unions have a much stronger mutual ethos than building societies, who these days often seek out wealthy customers in order to make their directors even wealthier.

Ian_W

jizba wrote: »

My main aim is not necessarily short term savings but a long term loan, is the CU a good option in this sort of situation?

You need to check with the individual CU you're thinking of.
The one I mentioned earlier loans at 9.9% which I believe is very good by CU standards but using your £20K loan over, say, 10 yrs you'd be paying back not far short of £4K more than if using Northern Rock at 6.5% - if you don't need or wish for basic life insurance on the loan.
CU = £258.58pm x 120 months = Total Interest £11,029.14
NR = £225.67pm x 120 months = Total Interest £ 7,080.40
In fairness to CU's the rates are available for smaller consumer type loans where many lenders "typical" rates are often higher but for larger longer term loans then you're paying quite a high premium for mutuality.

baby_boomer wrote:

Credit Unions have a much stronger mutual ethos than building societies, who these days often seek out wealthy customers in order to make their directors even wealthier.

I think that can vary. The CU I was a founding member and later president of in the early 80's was able to advertise "The cheapest way to borrow, the easiest way to save" as it's recruiting slogan. Savings were deducted from pay and loans, even at 12.68%APR :eek: , were cheaper than personal loans, HP and a fraction of the cost of credit or store cards.
Obviously we're in a much lower IR environment these days but the cost difference of 5.6% between the savings dividend paid out [4.3%] and the loan interest charged [9.9%] is far, far greater than many BS's or even Banks.
As with BS's mutuality should bring benefits for members but can result in a lack of control that shareholders bring to a public company meaning the benefits are enjoyed by the staff and directors - rather than the members!

Compound_2

quinlanmd wrote: »

Savers in credit unions tend either to be philanthropic (accepting a lower interest rate on their savings in the knowledge that those in need will be able to borrow from the credit union at reasonable rates of interest) or those seeking to borrow from the credit union either now or in the future.

As well as the cost of the loan, it’s necessary to factor in the opportunity cost having to have saved at their poor rates. What amounts and length of time are we talking? In building societies, £100 at poor rates can pay off, but in most cases this is a £5 a year donation to the directors. It’s worth noting that CU dividend rates are capped at 8% (and you’ll never get anywhere near the maximum), whereas Lloyds Monthly Saver pays 8% guaranteed.

Rich philanthropists are needed but surely the strict ‘common bond’ requirement would mean that all members belonged to the same social class. For example, the same neighbourhood or occupation.