Chapter 1
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Types and Characteristics of Credit
Credit is the loan department’s
product. Like any product, credit has
features that define it. And, just as anyone who offers a product should know
its features, you as a loan professional
should know the features of credit. You
should also know how these features
benefit members.
There are four distinct types of
credit, with several characteristics
common to each, as shown in figure 1.1. All consumer credit is either
closed-end or open-end, and either
unsecured or secured. Credit is further
defined by interest rates, maturities,
and terms of repayment. Together,
these types and characteristics determine how the products you offer fit
members’ borrowing needs.
Most consumer loans can be made
as either closed-end or open-end
loans. Purchase money mortgage loans
are generally done only as closedend loans. Each credit union chooses
whether to handle consumer loans as
open-end or closed-end credit. Either
method of making loans has advantages and disadvantages.
Closed-End Credit
Closed-end credit is so-called
because it is not continuous. The
exact amount of money that will be
advanced is determined at the outset. The credit ends when the loan is
repaid. If members want to borrow
additional money or purchase more
goods, they must complete a new
Objectives
Upon completion of this chapter,
you will be able to:
1. Explain the meaning of closedend, open-end, unsecured, and
secured credit;
2. Define the following terms: collateral, title, lien, perfecting the
lien, financing statement;
3. Describe fixed and variable
interest rates, and the differences between them;
4. Explain why maturities are
established for loans;
5. List three examples of repayment terms.
application and set up a new loan.
This credit is also known as installment credit if the loan is repaid on a
regular basis with a fixed amount, or
installment.
Benefits and Disadvantages
of Closed-End Credit
The traditional way to handle consumer loans was to make a one-time
extension of credit. Some credit unions
continue to make all their loans closedend, except for credit that cannot be
extended as closed-end—credit cards
and overdraft lines of credit. For those
credit unions, closed-end lending is a
familiar and comfortable way to grant
credit.
The advantage of closed-end credit
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Types and Characteristics of Credit
Figure 1.1
Types of Credit
Closed-End Credit
Characteristics
Benefits
Examples
Not continuous
May apply to
unusual loans
(single payment,
balloon payments)
Home purchase
Inflexible
Has one purchasing
purpose
Generally repaid on
regular basis with a
fixed amount
Defined repayment
schedule
Continuous
Open-End Credit
Ongoing use of
credit
One-time
application
Finance charge
(interest)computed
on outstanding balance
May borrow
repeatedly
Personal loans
Single payment
loans
Revolving charge
accounts
Lines of credit
Multi-featured plans
Saves time and
paperwork
Payments may vary
Convenient
with outstanding
balance
Both open-end and closed-end credit may be (a) secured by collateral or cosigners, or
(b) unsecured by collateral and based solely on the member’s promise to pay.
is that disclosures are required only
when the loan is made. One disadvantage is that the required disclosures are
very detailed; it’s easy to make mistakes that may result in penalties for
the credit union. Each time a member
borrows from the credit union, he or
she must complete a new application
and the credit union must provide new
closed-end disclosures. With each new
loan comes the risk of errors that may
result in penalties.
Open-End Credit
As its name implies, open-end
credit is continuous. Under an openend plan, members make a one-time
application and may obtain credit from
time to time. Some open-end plans,
such as a credit card or overdraft line,
have a specified credit limit; members
can use up to the limit without further
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THE LENDING PROCESS
approval from the credit union. Other
open-end plans offer various credit features, some of which have credit limits
and others that do not. These openend plans are referred to as multi-featured open-end plans.
Open-end credit must meet three
conditions:
1. The creditor must contemplate
repeated transactions under a
credit plan.
2. The creditor may impose a
finance charge from time to time
on the outstanding balance.
3. The credit available to the consumer must generally be replenished to the extent that earlier
credit extensions are repaid.
Payments on credit cards and overdraft lines are generally a percentage of
the outstanding balance. With multi-
Chapter 1
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Types and Characteristics of Credit
featured plans, each credit feature has a
separate payment. If the credit feature
is a line of credit, payments may vary
as the balance for the credit feature
changes. If the credit feature is for a
car loan, the payment is generally a set
amount that remains the same until the
amount is repaid.
Common examples of openend credit include revolving charge
accounts and lines of credit.
Benefits of Open-End Credit
• Revolving Charge Accounts
Open-end credit offers several benefits to members. It saves time and
paperwork because each loan request
does not require a new application. It
is also more convenient. Members can
obtain advances simply by calling the
credit union or requesting an advance
online. With some open-end systems
even secured loans can be made without having the member sign any additional papers. Another benefit is that
These accounts provide access to
credit with use of a credit card. The
card is issued either by a retailer or, in
cases such as VISA® or MasterCard®,
by a financial institution. Cardholders
may charge purchases up to a specified
limit. They are obligated to repay at a
minimum amount each month—typically three to five percent of the balance. In some cases, there is a “free
ride” period on new purchases. A typical credit card application is shown in
figure 1.2.
open-end disclosures are much easier
for the credit union to process, so there
is less risk of making mistakes.
Types of Open-End Credit
• Lines of Credit
Although some open-end plans can
be accessed with credit cards, convenience checks, or share drafts, it is not
necessary for an open-end plan to have
an access device. Some plans require
that the member call or visit the credit
union to obtain advances. Open-end
plans are not required to have a specific
credit limit. However, there must be a
reasonable expectation that the credit
union will lend to the member from
time to time, and that credit will be
extended if the member remains creditworthy. Large-ticket items, such as
automobiles, can be financed on openend plans.
Another type of open-end credit is
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5
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Types and Characteristics of Credit
Figure 1.2
Sample Credit Card
Application
Reprinted with permission © CUNA Mutual Group, form 12345V3. All rights reserved.
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THE LENDING PROCESS
Chapter 1
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Types and Characteristics of Credit
overdraft protection. Members with
share draft accounts use this to ensure
funds are available whenever they write
drafts. The credit union approves their
overdraft protection up to a certain
limit. Then, when they write drafts for
more than their accounts can cover, the
credit union creates a loan to make up
the difference. It treats this as a loan
advance, and the member repays it
with interest.
What types of credit are offered
by your credit union? To answer this
question, complete activity 1.1.
signature loans, since the member
simply signs an agreement to pay.
Unsecured, or signature loans,
increase the credit union’s risk. When
a member defaults on an unsecured
loan, a credit union may not be able
to collect by claiming any of the
member’s personal property (except for
shares on deposit at the credit union)
unless the member consents or a court
orders it. Usually court costs are more
expensive than the loss itself, so credit
unions often write off such loans without pursuing legal remedies.
Unsecured Loans
Secured Loans
Credit is not only closed-end or
open-end—it must be either unsecured
or secured, as well.
Unsecured loans are made without
collateral. The member’s promise to
pay is only guaranteed by the member’s
signature. Such loans are often called
Secured loans require the member
to provide collateral for the loan. Collateral, also known as security, is a possession of tangible value which secures
the loan until the loan is repaid. Collateral limits the credit union’s risk in two
ways. First, members are more likely to
Activity 1.1
Types of Credit
Talk to a loan officer, or appropriate staff person, to gather information about the types of
credit offered by your credit union.
What is the total amount of credit that is outstanding at your credit union?
____________________________________________________________________________
What percentage is closed-end credit?
____________________________________________________________________________
What percentage is open-end credit?
____________________________________________________________________________
Of the open-end credit, what is the amount of revolving charge accounts?
____________________________________________________________________________
What is the amount of overdraft protection, another type of open-end credit?
____________________________________________________________________________
____________________________________________________________________________
____________________________________________________________________________
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The way in
which a lender
perfects its
security interest
in property
depends on
the type
of property.
Types and Characteristics of Credit
repay loans when their possessions are
at stake. Second, if a member defaults
on a loan, the credit union may repossess the security, sell it, and apply the
proceeds to the loan balance. In the case
of a share-secured loan, the shares are
offset against the loan balance.
Security Interests
To repossess collateral, the credit
union must prove it has a legal claim
to the property. This claim is called a
lien, or security interest. A credit union
obtains a security interest in property
by having the owner of the property
sign a security agreement. To repossess, a credit union only needs a security interest in the property.
• Perfecting the Security Interest
Although a credit union has rights
to property in which it has security
interest, other creditors may also have
rights in the same property. When this
happens, a lender that has perfected
its security interest generally will have
superior rights to the property. The way
in which a lender perfects its security
interest in property depends on the type
of property. Security interests in motor
vehicles are perfected by having the
Acceptable and unacceptable collateral include…
Acceptable
Unacceptable
• Shares
• Future wages
• Stocks
• Shares not in member’s account
• Personal property
• Certain household goods for
loans other than their purchase
• Real estate
• Guarantor signature
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THE LENDING PROCESS
credit union’s security interest noted on
the title for the vehicle. The process for
doing this varies in each state.
If the property doesn’t have a title
(for example, some boats, travel trailers, and satellite dishes), the credit
union’s security interest usually can
be perfected by filing a financing statement, also known as a UCC-1, with the
state. Security interests in some property can be perfected without filing.
If you are making secured loans, it’s
important that you learn how to perfect the credit union’s security interest
in each type of property taken as collateral.
In order for collateral to fully secure
a loan, its value must equal or exceed
the loan amount. Otherwise, when
repossessed and sold, the collateral may
not cover the loan balance.
• Financing Statements
Figure 1.3 shows a financing statement. Check at your credit union to
learn how financing statements should
be filed in your state and complete
activity 1.2.
Unidentifiable Collateral
Items with no title or serial number
are difficult to use as collateral. These
include jewelry, furs, and precious metals. The difficulty lies in determining
their loan value, and disposing of them
if the member defaults.
To ensure its claim on such items,
the credit union may want to take possession of them. This means finding
a place to store them and accepting
responsibility for their safe-keeping.
They are also difficult to resell at a fair
Chapter 1
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Types and Characteristics of Credit
Figure 1.3
UCC Financing
Statement Sample
Form
Source: www.ss.ca.gov. Click on the California Business Portal then Uniform Commercial Code, then Forms and Fees to
access the national financing statement, form UCC-1.
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Chapter 1
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Types and Characteristics of Credit
Activity 1.2
Financing
Statements
Talk to a loan officer, or appropriate staff person, to learn how financing statements should
be filed in your state. List the procedure.
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
price or their market value may change.
Therefore, many credit unions discourage or prohibit the use of these items as
collateral.
Types of Acceptable Collateral
Credit unions do accept a variety of
collateral. Some common types include:
• Shares. Members may pledge
the money on deposit in their
credit union share or investment
accounts, but not IRAs. This type
of security offers the least risk to
the credit union.
• Stocks. These may be used if they
are assignable and their value is
determined but it’s risky because
stock value fluctuates.
• Personal property. Personal property includes a wide variety of
items—new and used automobiles
and trucks; new and used boats,
motors, and trailers; new and used
mobile homes; new and used travel
trailers and campers; and aircraft.
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THE LENDING PROCESS
Certain household goods such as
furniture and appliances may only
be used to secure loans for their
purchase.
• Real estate.
• Guarantor. Guarantors and cosigners are not the same, although
both may agree to pay the debt of
another. A cosigner (sometimes
referred to as a comaker) usually
signs the credit agreement, but a
guarantor signs a separate guaranty agreement. Guarantors are
secondarily liable; cosigners are
primarily liable.
Both guarantors and cosigners agree
to be liable for a member’s loan if the
member defaults, but neither receive
the loan proceeds. There is a Federal
Trade Commission rule which requires
that a guarantor or cosigner be given
a disclosure about his or her responsibilities. Figure 1.4 shows the Notice to
Cosigner. Figure 1.5 is an example of
an agreement a guarantor might sign.
Chapter 1
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Three
characteristics
common to credit
are interest
rates, maturities,
and terms of
repayment.
Types and Characteristics of Credit
Cosigners sign the actual loan agreement. They are considered jointly liable
for the loan. Normally, all who sign a
loan document are jointly liable, which
means the lender can look to any of
them for payment. This means the borrower would not have to be in default
for the other party to be required
to pay. Members who cosign a loan
should be aware of the legal undertaking they are committing themselves
to. Using guarantors or cosigners is an
excellent way to help young members
with no established credit. Guarantors
or cosigners should never be used to
overcome a member’s credit problems.
Types of Unacceptable Collateral
Federal Trade Commission rules
prohibit certain credit practices. In
regard to collateral, lenders are prohibited from taking household goods
as security for any loan other than
the loan that purchases the household
goods. They are also prohibited from
taking future wages as security. The
credit union may, however, arrange for
loan payment through a voluntary payroll deduction plan without violating
the credit practices rule.
Characteristics of Credit
Three characteristics common to
credit are interest rates, maturities,
and terms of repayment. Each of them
affects how the credit will be repaid.
Interest Rates
Interest is a charge (there may be
other charges and fees) members pay
to use the credit union’s funds. Federal
credit unions and most state-chartered
credit unions compute interest using
the “U.S. Rule” which is a simple
interest method of calculating interest.
Interest is charged on the daily balance
or average monthly balance of the loan.
Most credit unions offer two types of
interest rates—fixed and variable.
Fixed Rates
The distinction between a fixed and
variable rate is that a variable changes
according to changes in an index.
Fixed interest rates remain the same
for the length of a closed-end loan. For
example, if a member borrowed $1,000
for one year at 12 percent, the monthly
payment would be $88.85. Because
the interest rate is fixed, the interest
rate remains the same until the loan is
repaid. This is not necessarily true for
open-end loans.
For open-end loans, an interest rate
that varies according to an index or
formula is a variable rate. Credit unions
may also change the interest rate on an
open-end plan, such as a credit card,
by giving their members prior notice
of the change. This is considered a
fixed rate, because the rate is fixed until
the credit union has given notice of
an increase and the member uses the
account after receiving the notice.
• Benefits and Disadvantages
of Fixed Rates
Fixed interest rates benefit members
by offering certainty. For closed-end
loans, members can count on their loan
payments remaining the same and can
budget accordingly. In effect, they are
locked in to the rate, so they are not
negatively affected if rates climb during
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Types and Characteristics of Credit
Figure 1.4
Sample Notice
to Cosigner*
Notice to Cosigner
You are being asked to guarantee this debt. Think carefully before you do. If the borrower
doesn’t pay the debt, you will have to. Be sure you can afford to pay if you have to, and
that you want to accept this responsibility.
You may have to pay up to the full amount of the debt if the borrower does not pay. You
may also have to pay late fees or collections costs, which increase this amount.
The creditor can collect this debt from you without first trying to collect from the borrower.
The creditor can use the same collections methods against you that can be used against
the borrower, such as suing you, garnishing your wages, etc. If this debt is ever in default,
that fact may become a part of your credit record.
This notice is not the contract that makes you liable for the debt.
_____________________________________________________________________________
I hereby acknowledge receipt of the “Notice to Cosigner.”
Dated this __________________ day of ___________, 20_____.
___________________________
Cosigner
*From FTC Credit Practices Rule. State laws may require a separate additional notice.
12
THE LENDING PROCESS
their loan. At the same time, however,
they cannot benefit from a decreased
payment if rates drop. They can refinance the remaining balance, but this
involves some paperwork and may
involve additional costs.
Members may also pay a higher rate
for fixed interest. Charging a higher
fixed rate is the credit union’s way of
protecting itself against unforeseen,
sharp rate increases.
By using variable rates, credit unions
limit their interest rate risk. They avoid
committing the credit union to earning
low interest rates. If the market interest
rates should increase, the credit union’s
earnings on variable-rate loans can also
be increased. Consequently, the credit
union can offer variable rates that, at
least initially, are lower than fixed,
since it can adjust these rates along
with the market.
Variable Rates
How Variable Rates Are Set
Rates that adjust up and down
throughout the loan term based on an
index or formula are called variable.
A credit union sets variable rates by
using an index or formula. It selects as
its index either its own cost of funds
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Types and Characteristics of Credit
Figure 1.5
Sample Promises
and Guaranty
Agreement
Promises and Guaranty Agreement
Account # ______________________
TO: __________________________________________________________ Credit Union
FOR: __________________________________________________________
Borrower
In order to encourage the Credit Union to extend credit to the borrower, and to cause
the Credit Union to be more secure on any money now owing to the Credit Union by the
borrower, I agree to guarantee and pay the Credit Union all money now loaned to the
borrower and which may afterward be loaned to the borrower on terms as agreed to by
the borrower.
POWER OF ATTORNEY
I hereby authorize the borrower to act as my agent for the purpose of
(1) making payments on this agreement,
(2) renewing this agreement by part payment,
(3) Making agreements for renewal by additional oral or written promises to pay the
obligations contracted pursuant to this agreement,
(4) receiving any written or oral notices,
(5) authorizing making changes of (a) interest rates, (b) payment amounts, and (c) by
extending or shortening the number of payments to retire these debts which I am
guaranteeing,
(6) agreeing to the repossession and sale of collateral,
(7) agreeing to the releasing of collateral,
(8) agreeing with the Credit Union for a variable interest rate on the borrowing, and
(9) extending the statute of limitations in which each payment by the borrower shall be
considered as payment by me.
The failure of the Credit Union to exercise any rights shall not later be considered a giving
up of any rights on any future transactions or acts of the borrower, myself, or the Credit
Union.
A release of the borrower or another person guaranteeing for this borrower shall not
release me except for any amount actually paid by the borrower and any other guarantor.
You need not first proceed against the borrower named above before resorting to me for
payment. I agree that I may be sued for payment, although the person named as borrower
above may be able to pay.
This guaranty is not conditioned upon the pursuit of any remedies against the borrower or
against any other person or persons or the pursuit of any other remedies the Credit Union
may have.
I as guarantor further waive notice of acceptance of this guaranty; of the respective
maturities of any charges or extensions of time hereunder; and further waive presentment
for payment, notice of payment, protest and notice thereof.
I, as guarantor, may be relieved of liability for future advances of money only upon receipt
by the Credit Union as a signed, written statement that I will not be liable for further and
future advances. Such notice shall not limit my obligations for money loaned prior to
receipt of my notice.
FOR THIS PURPOSE I ADMIT THAT I HAVE RECEIVED A FORM FOR USE FOR
SUCH REVOCATION OF GUARANTEE AT THE TIME OF SIGNING THIS GUARANTY
AGREEMENT.
I hereby agree that I have read both sides, and received the separate document entitled
“Notice to Cosigner.”
See reverse side for additional agreement.
DATED and signed this ____________ day of ________________, 20 __
________________________________________________________
Guarantor
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Types and Characteristics of Credit
Figure 1.6
Formula for Setting
Variable Rates
Index + Spread = Variable Rate
or an outside index. Cost of funds is
a percentage derived from what the
credit union pays in interest on money
it borrows and dividends it pays on
members’ share account. However,
using cost of funds is not allowed for
home equity loans. Outside indexes
include Treasury bill rates, the bank
prime rate, and the Federal Reserve
Board’s discount rate.
To whatever index it uses, the credit
union may add a spread. A spread is a
percentage that covers the operational
costs of providing credit and generating a return used to pay dividends on
savings accounts.
Figure 1.6 shows the formula for setting variable rates. As the cost of funds
or outside index changes, credit unions
can adjust their variable rates according to any limits in each loan contract.
How does your credit union set variable rates? To answer this question,
complete activity 1.3.
Variable-Rate Limits
Some credit unions set limits on the
amount variable rates may increase or
decrease and some states may set limits
on variable-rate increases. The federal
Truth-in-Lending Act and Regulation
Z doesn’t require a cap, or ceiling, on
interest rates for variable-rate loans
secured by any dwelling of the borrower. However, if a cap is imposed by
the creditor, it must be disclosed. Caps
help relieve members’ concerns about
unplanned increases. For example, a
credit union may offer an initial variable rate of 8.9 percent with 2 percent
annual caps and a 5 percent cap for
the life of the loan. This means the rate
cannot be raised more than two percentage points in a year, and can never
go higher than 13.9 percent. If set too
strictly, however, such limits defeat the
purpose of variable rates.
Effects of Variable Rates
When the variable rate changes, the
change will affect either the payment
amount, the number of payments, or
the outstanding balance.
On a short-term loan it is best to
leave the payment the same and extend
the loan, because the extension will
probably be for only a few months.
Members can count on budgeting the
same amount each month, and credit
unions are free from changing payroll
deductions or giving advance notice of
14
THE LENDING PROCESS
Chapter 1
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Types and Characteristics of Credit
Activity 1.3
Variable Interest
Rates
What is the current variable rate at your credit union?
___________________________________________________________________________
What index does your credit union use to set variable rates?
___________________________________________________________________________
What is the spread that is added to the index?
___________________________________________________________________________
How has the variable rate at your credit union fluctuated over the past three years?
Current Year___________ Year II_____________ Year III ___________
payment changes.
However, this type of adjustment
could cause the collateral’s value to
decrease faster than the outstanding
balance. If the member defaulted on
such a loan, the credit union would not
be able to recover the full loan balance
from the collateral. Or, on closed-end
loans, the loan could exceed its maturity limit under state or federal law.
And on large, long-term loans, negative amortization could result. This
happens when the rate increases and
the loan payment no longer covers the
interest. Unpaid interest accrues each
month. In such cases, the member’s
loan balance would increase and the
principal might never be repaid unless
payments are increased or the interest
rate goes down again. To avoid such a
problem on long-term loans it is usually better to increase payments rather
than extend the term.
The option of increasing the balance
rather than the payments or extending
the term is not very attractive because
it results in a balloon payment due at
the end of the loan.
Benefits and Disadvantages
of Variable Rates
For members who are willing to
assume some risk, variable rates can be
beneficial. With them, members save
money on the initial rate of interest.
Depending on the adjustments, they
could save money over the life of the
loan. On a mortgage, a variable rate
may help people who might currently
have trouble with higher fixed rates,
but who can expect their incomes to
increase in the future. However, members may also end up paying larger
amounts over the life of the loan, or
paying for longer periods. In any case,
by offering both fixed- and variablerate programs, credit unions give members a choice.
Summarize the advantages and disadvantages of fixed and variable rates
of interest in activity 1.4.
Maturities
A loan’s maturity is the date when
it will be fully repaid. Credit unions
determine maturities based on the
type of loan, the amount, and the collateral. For example, a $6,000 loan for
a three-year-old used car may have a
THE LENDING PROCESS
15
Chapter 1
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Types and Characteristics of Credit
Activity 1.4
Fixed and
Variable Rates
List the advantages and disadvantages of fixed and variable rates from both the credit
union’s and the member’s perspectives.
Fixed Rates of Interest
Advantages
Disadvantages
for the credit union
____________________________________
__________________________________
____________________________________
__________________________________
____________________________________
__________________________________
____________________________________
__________________________________
for the member
____________________________________
__________________________________
____________________________________
__________________________________
____________________________________
__________________________________
____________________________________
__________________________________
Variable Rates of Interest
Advantages
Disadvantages
for the credit union
___________________________________
_________________________________
___________________________________
_________________________________
___________________________________
_________________________________
___________________________________
_________________________________
for the member
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THE LENDING PROCESS
___________________________________
_________________________________
___________________________________
_________________________________
___________________________________
_________________________________
___________________________________
_________________________________
Chapter 1
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Types and Characteristics of Credit
maximum maturity of three years. At
that time, the car would be six years
old and considerably depreciated. With
a longer maturity, the loan might reach
a point where the car’s value did not
cover the outstanding balance. Then
the loan would no longer be fully
secured.
Offering members a choice of
maturities up to an established maximum helps credit unions tailor their
loan programs to members’ needs.
With new car loans, for example,
credit unions may offer a three-, four-,
five-, or six-year maturity. Members
then have the option of a shorter loan
commitment with larger monthly payments, or a longer loan commitment
with a greater total interest, but more
affordable payment.
Terms of Repayment
The terms of repayment are the conditions under which members pay back
their loans. Credit unions establish
terms based on the members’ income
and ability to repay, as well as the
loan’s amount, purpose, and collateral.
The most common term of repayment is monthly installments. Many
members use payroll deduction or
automatic account withdrawals to
make their monthly payments. Another
type is the single payment. Members
employed seasonally may need single
payment loans. For example, farmer
may pay off a loan after the crop is harvested. A third type of repayment is the
balloon note. Under its terms, members pay smaller monthly installments
and one large final amount.
Members who have difficulty meeting their original terms of repayment
may request help from their credit
unions. In such cases, credit unions
have two options—either an extension
agreement or a refinanced loan. An
extension agreement delays the date
of payment, giving members time to
recover from an unexpected layoff or
illness. A refinanced loan pays off the
member’s original loan and creates a
new loan. If the term of the new loan
is extended, the loan payments will be
lower.
Summary
Credit exists in four types—either
open-end or closed-end, and either
unsecured or secured. Open-end loans
are more flexible than closed-end.
Unsecured loans are also called signature loans, because their repayment
is guaranteed solely by the member’s
signed promise. Secured loans are
guaranteed by any of several forms of
collateral, including shares, automobiles, stocks, and other personal or real
property (real estate).
Credit is also defined by interest
rates, maturities, and terms of repayment.
Interest rates are either fixed or variable. Variable rates adjust according to
changes in a chosen index.
By offering both fixed and variable
index rates, different maturities and
various terms of repayment, credit
unions tailor their lending programs to
meet members’ needs.
THE LENDING PROCESS
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