Jill Kerby

CREDIT UNION RESTRICTIONS MIGHT SPUR THE GROWTH OF FAMILY LENDING

As anyone who has sought a mortgage over the past couple of years can attest, you need to be able to jump through some very tight, fire-lit hoops to secure a homeloan.  Now it seems, even that precarious hoop has been yanked away…for people who have been turning to their local credit union for financial assistance.

The decision by the Central Bank to impose new lending rules on nearly 300 (of the 409) credit unions means that perhaps seven out of 10 CU members will have their request for a loan turned down this coming year.

In light of the high rate of repayment arrears throughout the credit union network – at about 14% of outstanding loans – limits as low as €5,000 are being imposed on individual lenders in some CUs, which might be enough to buy a second hand car, or a new bathroom, but isn’t going to go very far if you have a start up business and desperately need some capital to invest in new stock or fund a export drive.

Even at that rate of loan offer, some credit unions say the new limits will use up their quota within 10 days and “borrowers are going to need to get into the queue quickly,” a CU lending committee member told me. “And I’m not sure that kind of borrowing pressure is particularly helpful:  too many people rushed into unsuitable borrowing during the boom years. Now they might do so because they’ll be afraid there won’t be any money left if they don’t get their application in before everyone else.”

According to reports last week the Credit Union Managers' Association are seeking meetings with the Regulator in an effort to convince them that the restrictions are going to penalize “good and loyal customers” and force many (especially in the run-up to Christmas) to turn to moneylenders who can charge up to 180% interest rates.

Unfortunately, the Central Bank does have grounds for imposing what appears to be such draconian limitations on what so many people have been counting on being their only hope for affordable credit.

The 14% arrears statistic on outstanding loans of nearly €7 billion is concern enough, but the danger is that the assets underpinning many of those loans – property and members’ jobs security – are still falling in value or at risk.

Poor lending standards during the boom years is, I understand, a problem the Regulator has uncovered in too many CUs, with too many additional loans approved based only on the borrowers’ good track record of repaying existing ones.  The danger is that these loans were taken out in order to repay the older ones.

The Credit Union movement may be “exasperated” by these new limitations, but so must their members be:  70,000 people joined their neighbourhood credit union last year, with many of them presumably doing so because their CU was still open for business, unlike their high street bank.

Now, even these people, that is, the ones with sound incomes and no impaired credit record, may have to postpone their borrowings or seek out a new source of credit.  It isn’t unreasonable to imagine more family sources being tapped, which isn’t really such a bad thing given the very low interest returns that many people are getting from their bank, post office or credit union.

“I think families and friends are going to have to consider inter-familial lending – if they haven’t already done so - if this credit crisis lasts much longer,” my CU source said last week.

“If we are restricted to only giving out very small loans, and only within a set credit limit every month, I don’t doubt we will see many people withdrawing money for their accounts to lend to their children, grandchildren or friends who need money for education purposes, to replace an old car, to make essential repairs to their homes.”

It can be very embarrassing or difficult to ask for a loan from a family member, but so long as it is drawn up properly – with appropriate interest and in full understanding of the risks of perhaps not being repaid – is worth exploring.

A €10,000 sum on deposit in your bank or credit union is probably only returning a net 2%-3% interest or a mere €200-€300. Any increase on this rate – from a family member whom you trust to repay it – is a profit that might be worth considering, especially for the borrower if you are willing to set the loan on a diminishing balance and not on a compound interest basis.  

A €10,000 ‘family’ loan - officially made as a tax-free gift -  repaid over five years in equal monthly repayments on a flat 5% interest rate, shouldn’t cost more than €175 or €2,100 a year to the borrower, but is still worth €300 more in interest than your typical bank/credit union return.