Question for people who understand banking/loans

You folks are smart, and this one has been baffling me for a long time...

I do my banking at a credit union. Among the products offered are car loans and loans secured against one's savings account.

If I default on a loan taken against my savings account, all the credit union needs to do to recover their money is to take it out of my savings account.

That's fairly easy to do. The rate on such loans is 3.1%

If I default on my car loan, they have to pay a repo man. They have to file paperwork to legally acquire full title, and they have to eat some auction fees in order to get the car sold and recover their money.

That's a lot of work and a lot of cost. I would assume that those costs would eventually be charged back to the borrower, but it becomes unsecured debt.

For car loans, their rate is 2.99%

It seems to me that the loan that is easiest to recover in case of default should have the cheaper interest rate. What am I missing?

There’s probably nothing stopping someone from cashing out their savings account and then defaulting on their loan.

RX Reven' wrote: There’s probably nothing stopping someone from cashing out their savings account and then defaulting on their loan.

I don't know but I tend to agree. The value of the car is something they can be reasonably sure of and can reasonably predict, any time any place.

The savings account on the other hand, is not dependable or predictable.

My guess would be that during a bankruptcy the savings loan backed account is looked at as unsecured, whereas the car would be going back.

Purely speculation here: When they grant a car loan, they already know how much they'll be able to get back. Repo costs, auction costs, all that factored in without mention, and unless you total it or do a really odd custom job while you're paying for it, it probably works out profitable either way. They get the interest you paid, then something from the collection agencies, and something from the auctions.

Secured to the savings account, you fight with the wife, she drains the account, they are going to jump through hoops trying to get that money back from you with paperwork, investigations, etc. That .02% still isn't much difference anyway unless you're talking WAY more than any normal person could get in a loan. Or thousands of loans added together.

Its pretty simple: They've calculated that the car loans are less risky than the savings-back loans. That might be hard to believe, but those are [probably] the results.

And yes, Rev-Rico, for the most part banks know exactly how much it will cost to repossess and sell a vehicle, and they have a pretty good estimation of what it will bring.

Evan -- These two loans have different underwriting criteria, meaning that comparing risk between them is more complicated than the use case you've thought through.

nderwater wrote: Evan -- These two loans have different underwriting criteria, meaning that comparing risk between them is more complicated than the use case you've thought through.

Yeah, I kind of figured it was something deeply complicated and difficult to explain to a layman.

As for the other posts, when they say savings-secured loan, they mean it. They won't let the account holder (or anyone else) drain the savings account below the balance on the loan, so that's not it.

It has almost nothing to do with risk and everything to do with marketing.

The CU has to have a very sharp pencil to get car loans, which is their bread-n-butter product. Lot's of competition for those loans...and a big appetite.

Their share-secured loan interest rate probably hasn't been looked at in a while. They don't do many of these and don't need to. Plus, you continue to earn whatever interest rate they are paying on savings, potentially offsetting some of the loan interest. This is a convenience loan for you, and just an accounting chore for them.

What about using your savings to buy the car and then instead of a monthly payment, just deposit that amount back into your savings account. If you pay yourself the same as your loan payment would've been then you effectively make the 3.1%. At least in terms of your eventual balance. I'm guessing you don't want to have your savings account that low in case you need the money in an emergency, but you wouldn't be able to touch it unless the car was paid off anyway.

Interesting that the regular car loan is cheaper though.

EvanR wrote:

nderwater wrote: Evan -- These two loans have different underwriting criteria, meaning that comparing risk between them is more complicated than the use case you've thought through.

Yeah, I kind of figured it was something deeply complicated and difficult to explain to a layman. As for the other posts, when they say savings-secured loan, they mean it. They won't let the account holder (or anyone else) drain the savings account below the balance on the loan, so that's not it.

The savings backed loan is most likely intended to be a credit builder and not as a replacement for a car loan or personal loan.

The higher interest is the cost using the secured loan to build (or rebuild) credit. Not very expensive when you compare it to a secured credit card.

jstand wrote:

EvanR wrote:

nderwater wrote: Evan -- These two loans have different underwriting criteria, meaning that comparing risk between them is more complicated than the use case you've thought through.

Yeah, I kind of figured it was something deeply complicated and difficult to explain to a layman. As for the other posts, when they say savings-secured loan, they mean it. They won't let the account holder (or anyone else) drain the savings account below the balance on the loan, so that's not it.

The savings backed loan is most likely intended to be a credit builder and not as a replacement for a car loan or personal loan. The higher interest is the cost using the secured loan to build (or rebuild) credit. Not very expensive when you compare it to a secured credit card.

This is the answer, its like a secured credit card. The loan is available for clients they trust and who bank with them, but don't trust them to as much as the A tier credit score loans. Car loans can be weird depending on your risk. I have seen as little as 2.99 on a 10 used year exotic and as high as a 9.99 on a 24 month for a Civic.

jstand wrote: The savings backed loan is most likely intended to be a credit builder and not as a replacement for a car loan or personal loan.

That's pretty much what I use mine for. Not so much a "credit builder" as a "credit maintainer".

My credit was good, but dropping like a stone because I didn't want/need a loan.

I got a $1k loan at 3.1%. Deposited the loan money straight into my savings account at 0.1% with autopay. 12 payments at $85.00. It costs me $20/year in interest to keep my score from dropping.

I still think it's a racket, but I'll play the game at a cost of $20/year.