Credit Union Member Seeking a Loan While Holding Shares
Declan has been a member of his local credit union for 12 years. He holds €9,000 in shares (his savings) and has an existing €4,000 personal loan with 18 months remaining. He now wants to borrow €25,000 over 5 years to renovate his kitchen. His credit union's lending policy caps total member lending at a multiple of shares and applies a maximum loan-to-shares ratio; the loan officer notes that Declan's shares would need to be considered. Declan asks whether he can simply 'use his shares' to reduce the loan and whether his shares can be taken as security. He also mentions he may need to withdraw €5,000 of his shares in 6 months for a family event.
1. Explain how Declan's existing shares interact with his new loan application, including the concepts of loan-to-shares ratio, security, and the effect of his planned €5,000 withdrawal.
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Loan-to-shares ratio: credit unions commonly assess a member's borrowing against their shares. Declan has €9,000 in shares and wants €25,000 - a loan-to-shares ratio of about 2.8x on the new loan alone, and roughly 3.2x if the existing €4,000 balance is added (€29,000 total against €9,000 shares). Whether this is acceptable depends on the credit union's own lending policy and the loan officer's assessment of his repayment capacity; a high ratio may require additional security, a guarantor, or a reduced amount.
Shares as security: a member's shares can be pledged/offset against a loan in many credit unions, but this is a policy matter and shares are generally not a substitute for assessing repayment capacity. Crucially, shares offset only up to their value - €9,000 does not 'cover' a €25,000 loan.
The planned withdrawal is the key issue: if Declan pledges his shares as security and then withdraws €5,000 in 6 months, the security base drops to €4,000 and the loan-to-shares ratio jumps to over 7x. The credit union should flag this now. Either the withdrawal is deferred, the loan amount reduced, or the security arrangement revised.
Recommendation: treat the €5,000 as committed and excluded from any security calculation; assess affordability on income, not on shares.
2. Declan says: 'Just take the €9,000 of shares off the loan and give me €16,000 - that's simpler.' Identify the risks in this approach and what you would advise.
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What he is really proposing: using his savings to reduce the borrowed amount. On the surface this lowers his debt and interest cost, but it strips his savings buffer.
Risks:
- Loss of liquidity: after using the shares he has little or no savings. If an unexpected cost arises (car, medical, the family event), he has no buffer and may need to borrow again - possibly at a higher rate or on worse terms.
- Loss of the shares' offset benefit: while shares are pledged against a loan, they can effectively reduce the interest charged on the borrowed portion in many credit unions. Cashing them in removes that offset.
- The family event still looms: he already expects to need €5,000 in 6 months. If he has used his shares to reduce the loan, that €5,000 must come from somewhere else - likely more borrowing.
- Membership/eligibility: shares represent his membership stake; reducing them to a minimal level may affect his standing and future borrowing capacity.
Advice: keep a savings buffer (say 3–6 months of essential outgoings) and do not use it to prepay cheap debt. Compare the interest saved by reducing the loan against the cost and risk of having no emergency fund. A middle path - borrow a somewhat lower amount but retain a cushion - is usually better than emptying the shares. Confirm the credit union's actual offset and security rules before deciding.