LOUISE FAIRSAVE: Invest in a credit union
One great way to invest precautionary funds is in a credit union. Becoming a credit union member means getting involved in a democratic enterprise that will be looking out for members’ continuing development and benefit.
The cost of initial membership is low; this may be as low as $5. Then, investment can be made by buying shares or making deposits in the credit union.
Investment returns come from the annual dividend on shares as declared by the executive of the credit union. This dividend may vary from nothing to a maximum of five per cent. Low dividends sometimes prove to be a turn-off to would-be members who measure this return against the commercial banks’ deposit rate.
Similarly, the deposit interest rate of the credit union may be lower compared to the commercial banks’ deposit rate. The relative meagreness of the credit union rates must be matched against the value of the other benefits the credit union provides.
Each member has one vote no matter the extent of his/her financial interest in the credit union. So each member has as much say as any other.
Then there is the ability to borrow with minimal hassle. Before you can have a loan approved though, you need to have saved with the credit union for some time. It requires less money invested in shares in a credit union to support a loan as compared to a bank deposit to support a bank loan. In addition, collateral requirements for the credit union are typically simpler and cheaper to establish than with a bank.
Each credit union has a maximum loan limit for any one loan, which will be less than the typical commercial bank. So, before you invest in a credit union, check that the one you choose can meet your likely borrowing needs. Credit unions also tend to have longer repayment periods and lower effective rates of interest on loans compared to the commercial banks.
Furthermore, in the case of a commercial bank, the borrower may incur a penalty for repaying the loan before the scheduled instalments are due. Whereas, in the case of the credit union, whenever the loan is repaid before the scheduled instalments, the member will save on paying interest which would normally have been payable. This is because for the credit union, interest is computed on the reducing balance.
Another most comforting benefit is the credit unions’ mutual benefit fund which provides insurance for repaying of loan balances of members should they die while holding an outstanding loan.
There is also the patronage refund benefit. Each year the credit union needs a certain amount of funds to meet operating cost and to set aside for reasonable reserves. In the year where funds raised exceed these requirements, the executive of the credit union may elect to refund a part of the excess to the membership in proportion to the loan interest they paid during that year. Commercial banks do not refund “excess” interest; rather, they report record profits.
Furthermore, members can become fully involved in the management of the credit union, thereby learning more about managing loan funds, managing the business and working with people. Support training is usually provided freely by the credit union league. A period of successful management of one’s credit union can build the understanding required for starting and operating one’s small business.
For sure, you should consider investing in the credit union movement – it operates in your interest and for your benefit.
• Louise Fairsave is a personal financial management advisor, providing practical advice on money and estate matters. Her advice is general in nature; readers should seek advice about their specific circumstances.