We think it is no secret to anyone that a loan can have not only a form of obligation, but also be a separate type of investment. Historically, one part of the population is experiencing a shortage of funds and take loans to cover it. But creditors can be banks, various financial institutions or private lenders. In this article, we take a closer look at this type of financial company as a credit union.
Definition and history of a credit union
A credit union or cooperative is a non-profit organization that is founded by individuals or trade unions on a cooperative basis specializing in mutual financial assistance by providing savings and loan services to its members at the expense of pooled cash contributions. In theory, formed for mutual lending and saving money of its members.
For the first time, credit unions appeared in Germany in the 1850s, and later spread to other countries – Austria, Italy, France, Russia, and the United Kingdom. In the Ukrainian lands, the first savings and loan association was established in 1869 in the town of Gadyach, Poltava region.
The greatest popularity in our area of credit unions found in the 90s immediately after the collapse of the USSR. Then such organizations were distinguished by persistence, regardless of the state of the economy. The number of deposits grew steadily, so participants could always count on a profitable loan.
Features of the activities of credit unions
As we have already indicated, credit unions are not commercial organizations. In other words, such a structure does not set the main goal of making a profit. First of all, such an organization is called upon to provide support to members of a cooperative who need financial assistance.
Often, entry into such a union is free and accessible to anyone. Most often, members of a single credit union may be employees of a certain company, residents of one district, or people who share one hobby.
A credit union can be created and registered only if there are at least fifty people who are united by a common attribute. All cooperatives must have capital formed, which is formed from the participation fees of participants.
All members of such an organization have the right to one vote, which cannot be violated or changed, it does not depend on the size of the initial payment or on the time of joining the credit union. Any person to whom the signs of the union are close, as well as the one who was recommended by at least one of the participants, can join such a formation. Exit time is not limited.
The principle of operation of credit unions is extremely simple and straightforward than from year to year and attracts investors. All members of the organization make contributions to the total “budget”, which gives them the right to receive a percentage when these funds are transferred to someone on credit. In addition, if necessary, all investors can also borrow these funds at a specified percentage. As a rule, this percentage is significantly lower than the bank.
Difference between a credit union and a bank
There are several basic criteria that distinguish banks and credit unions:
- Since a credit union is a non-profit organization, they, unlike a bank, do not seek to make a profit from providing money on credit.
- Only a participant can take a loan from a credit cooperative, while anyone can contact a bank.
- The organization and the client interact with each other on the basis of membership, and not on the principle of the company the client.
- A legal entity cannot become a member of a credit union.
In addition, investors should unite one community. This, by the way, plays an important role, which implies mutual responsibility.
- Such an organization has no right to use the money of investors for highly risky operations or speculations. All income received by the union must be distributed among the shareholders or used to improve credit conditions.
- All decisions on changes in the activities of the organization or other important decisions are made only with the consent of all members of the union.
An important aspect is that the organization will retain all its own funds that serve as integral parts of the total capital. Each participant can count on a loan at any time at a low interest rate. In addition to this, which is also quite important, all members of the union receive interest on their contributions in the amount of a certain statute.
Investing in a credit union advantages and disadvantages
Despite the fact that in theory such organizations have a simple and transparent structure, in practice the regulation of the activities of such companies is often ineffective. That is why in this area you can meet a lot of unscrupulous or simply fraudulent organizations.
Depositing deposits in credit unions is usually much more profitable than at a bank and there is an objective reason for that risks are also significantly higher. Similarly with banks, unions pay interest to their depositors through loan payments, but they promise much more.
For example, the credit union “Zaraz” currently offers to place funds for a period of 1 to 24 months at 27.5% per annum. For comparison, the average rate on deposits in Ukraine is 16.5%. So what advantages, besides the high rate, or disadvantages lie under such a profitable type of investment?
No matter how high the rates in credit unions are, you will still have to pay tax on deposit income. As in banks, the rate is 18.5%. In addition, you need to give 1.5% of the military collection. The process of investing in such organizations is different from the contribution to the bank. To place a deposit in a credit union, you must first become a member. To do this, the company signs a number of documents and pays the entrance fee and capital contribution. As a rule, they are purely symbolic 1 UAH.
The advantages of such an investment should be attributed to the fact that in a credit union no one will require the client to indicate the sources of income, primarily because of softer controlling. However, the situation may change after the liquidation of National Financial Services Commission, which previously regulated the work of non-bank financial organizations. Soon the NBU will take its place and, quite likely, will strengthen control over the sphere.
There is another side to the coin. Gentle regulation involves freedom for scammers.
Another nuance is poor payment discipline among borrowers. The banks have much more tools to deal with careless borrowers. Credit unions, especially small ones, do not have them. Therefore, they suffer serious losses.
A significant part of credit unions is not credible already at the level of websites. But even if one imagines that the company closes for objective reasons, customers will not receive compensation for losses, since deposits are not subject to the guarantees of the Deposit Guarantee Fund.
Potential threats and risks for the borrower
The microcredit market, especially in countries with not the strongest economies, is quite well developed, which creates a high demand for services not only banks, but also around financial institutions, which offer to save on registration and interest at the expense of increased risk.
Now we will explain the banking sector in most countries is carefully monitored and controlled. All companies are tested for compliance with the parameters specified in the law. But in the non-banking financial market, the situation is slightly different. The companies operating on it are pawnshops, credit unions, various microcredit services, etc. are in much less stringent conditions of control, which gives them the opportunity for fraud.
Speaking specifically about credit unions, we suggest considering options for possible frauds in their activities: Despite the clause that a group of people with similar activities or otherwise connected only for mutual lending is created by the group, there are a huge number of companies in the market that bypass these frames and take in their numbers absolutely everyone. Naturally, these organizations are designed to make a profit, even if the credit unions are de facto non-profit.
For example, in order to become a member of such a union, it is often necessary to pay 1 hryvnia for the entrance fee and 1 hryvnia to the total capital. After this “registration” you become a member of the union and can apply for a loan. When submitting an application, the process of its consideration and approval by members of the union is underway. There is a second pitfall here, as in many cases the borrower begins to pay interest on the loan from the moment the application is filed and the contract is signed, and not after the actual receipt of the funds “in hands”.
Therefore, it is beneficial for companies to delay as long as possible with a loan and receive interest out of the blue. Needless to say, there are a lot of “one-day” companies that live at the expense of the first customer payments, earn quick money this way and change their location (and often the name) in a couple of months.
How to recognize that a credit union works in bad faith?
To do this, we have compiled a list, based on which it is very likely that fraudsters can be identified:
- The company does not have a well-equipped office. Often, this is a small room in which sits from one to several people. The office looks empty and lifeless. The maximum that can be said about the belonging of an office to this company is a sign on the door printed on a color printer.
- No signs of long life. About the company there is almost no information on the Internet or the company’s website is a cheap one-page, made in haste.
- The use of questionable methods of advertising and promotion. I am sure many have met the announcement of loans “without an outpost and guarantors” printed on colored paper and hanging near the entrance.
- The company does not care whether the borrower has a place of work, his income and guarantors. In general, they are not at all interested in whether you will be able to repay the loan. The only question is a passport and identification code. If the borrower is 18 years old, he will not be denied.
- You are given payment details for the first payment even before you have read the terms of the contract or received the funds. If you yourself have to pay a fee to get a loan, you can safely carry off your legs from such an office.
In an ideal world where there is no lie and fraud, cooperation and membership in a credit union could bring significant benefits. However, we live in the real world, and working with such organizations can carry significant risks for both depositors and borrowers. We urge you to always soberly and objectively evaluate the company and carefully study all the information about it available.