Monday 19 August 2019

Your money: Is it time to ditch your bank and use a credit union instead?

Credit unions could become a real alternative to banks - if they get their prices right, reports Louise McBride

Thousands of people should soon be able to ditch their bank and instead manage their finances at their local credit union. Stock photo
Thousands of people should soon be able to ditch their bank and instead manage their finances at their local credit union. Stock photo
Louise McBride

Louise McBride

Thousands of people should soon be able to ditch their bank and instead manage their finances at their local credit union. This is because of plans by a number of credit unions to start rolling out current accounts by the end of the year. More than 30 credit unions are expected to start offering current accounts this autumn. These accounts will include a debit card and overdraft facility.

Although only a fraction of the credit unions around the country are set to offer current accounts by the end of the year, more should follow. This move on current accounts, combined with the rollout of mortgages by a growing number of credit unions, should see them becoming a viable alternative to banks - as long as they do not charge too much for their products and services.

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There are also a number of other reasons why people may prefer their local credit union to their bank. They are as follows.

Your loan is cleared when you die

When you take out a loan with a credit union, it will usually be cleared by the union's own insurance scheme if you die before paying it off. By contrast, if you still owe money to a bank when you die, it must usually be repaid from your estate.

For example, with Bank of Ireland, "where there is a loan balance outstanding after a customer has died, Bank of Ireland will liaise with the representatives of the deceased - either a family member or a solicitor handling the estate", said a spokesman for the bank. "We will ask for payment of the balance from the estate. If there is no estate, then a write-off is the only option."

Mortgages are different as you must usually take out mortgage protection insurance - which repays your loan should you die before repaying it - when getting one.

So one of the big advantages which credit unions have over banks is that your dependants or estate will not usually be called on to repay any money you have left outstanding on a loan after your death - as long as you are fully eligible for the free loan protection insurance provided by your credit union. There are conditions to - and age limits on - this cover.

You may get a rebate on loan interest

Credit unions often give loan interest rebates (a partial refund of the interest paid on a loan) to members who borrow money- thereby reducing the cost of the loan.

St Raphael's Garda Credit Union, for example, offered a loan interest rebate of 15pc last year. This rebate reduced the interest rate on its everyday loan from 8.25pc to 7.01pc.

The average loan interest rebate paid in the Republic of Ireland by credit unions affiliated with the Irish League of Credit Unions (ILCU) last year was 9.57pc - and the highest rebate paid was 30pc.

How valuable a rebate is will depend on the size of your loan - and the rebate. For example, if you paid €200 in loan interest in a given year and were then entitled to a rebate of 9.57pc, you would get a refund of €19.14. However, if you were entitled to a rebate of 30pc, you would get a refund of €60. "In recent years, many credit unions have opted to give higher loan interest rebates to those members who borrow from them," said a spokeswoman for the ILCU.

Banks do not offer interest rebates on loans.

You may get a cheaper loan

You could save thousands in interest on a loan by borrowing from your credit union instead of your bank - as long as your union offers cheaper loans than your lender.

St Raphael's Garda Credit Union, for example, charges 5.06pc interest on its car loans. By comparison, AIB charges interest of 8.95pc on its car loans; while Permanent TSB charges interest of 8.8pc, 9.3pc or 10.4pc - depending on the age of the car. Bank of Ireland charges interest of 6.8pc, 7.5pc or 8.5pc - depending on the size of the loan.

A five-year car loan of €25,000 would cost a borrower about €2,500 less in interest if taken out with St Raphael's than it would with AIB.

Credit unions often offer tailored loans - which can work out cheaper than the loans available from banks.

For example, Wexford's Altura Credit Union charges 5.02pc interest on its third-level education loans (available for students and apprentices) and iPad Assist loans (for the parents of secondary school students who need iPads). Should you wish to borrow for a major home renovation (such as an attic conversion), Altura charges 7.14pc interest on such loans. That 7.14pc rate is also available for car loans (as long as the car is bought from a dealer).

Cara Credit Union in Kerry charges 6.69pc interest on its car loans, 6.05pc interest on student loans, and 7.75pc interest on first-time loans and personal loans of €15,000 or more.

St Raphael's Garda Credit Union charges 4.33pc interest on its home improvement loans and 4.59pc on its educational loans.

As credit unions can charge up to 12.68pc interest on personal loans, they do not always work out cheaper for loans than banks. In practice though, credit unions often charge lower interest than 12.68pc.

You can get help with your budget

Many credit unions offer savings accounts - often known as wallet accounts - which ringfence your savings from other funds, so you can only access those savings at certain times of the year or for a specific reason. Such accounts can be useful if you are not good at managing money or sticking to a budget - as they can help ensure you have money set aside when you need it. They can be used to set aside money for holidays, Christmas, bills and so on.

Altura, for example, offers Christmas savings accounts which you can save into during the year - and only withdraw money from between November 15 and December 31. An Post's Money current account also provides savings wallets into which money can be set aside for upcoming expenses. None of the banks offer wallet accounts, though a spokesman for Bank of Ireland said it is "exploring the option of providing wallet accounts to customers".

On top of this, credit unions often offer discounts - such as discounted health screening and private health insurance - to members.

Day-to-day finances

Although most of us must currently use our bank for day-to-day finances, more than 50 credit unions have been approved by the Central Bank to provide current accounts. The Sunday Independent understands that at least 34 of these are set to offer a current account this autumn.

You may already be able to get your salary paid into your credit union account -and to set up a direct debit with your union. More than 130 credit unions in the Republic of Ireland allow their members to get their salary paid into their accounts - and about 80 of these offer direct debit services, according to the ILCU. Some credit unions offer ATM cards to their members too.

Could credit union loans get pricier?

Credit unions may start to offer more expensive loans in the future - on foot of plans by Finance Minister Paschal Donohoe to raise the credit union interest rate cap (under the current cap, unions can charge no more than an interest rate of 1pc a month on personal loans).

The aim of the plan is to help credit unions compete with money lenders and, in doing so, to provide access to credit to financially vulnerable individuals who would normally resort to expensive lenders.

There are concerns that the plan will encourage credit unions to engage in riskier lending practices.

Asked if the plan could push up the costs of loans for all credit union members, a spokeswoman for the ILCU said: "It will be a matter for each individual credit union whether or not they increase their interest rates in line with this move.

"Our understanding is that this will not lead to more expensive loans for credit union members in general, but will enable credit unions to compete more effectively with money lenders, who charge much higher rates, on riskier loans."

Given the strides made within credit unions, it would be unfortunate if changes to the cap led to more expensive loans across the board. Credit unions should bear this in mind if they really want to take on the banks.

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