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When a member wants to borrow money to buy a car or house or other big items, they go to the Credit Union for a loan. A loan is an amount of money given to the member for a certain amount of time. It will have to be paid back to the Credit Union along with an extra amount of money. This extra amount of money is know as interest. The amount of interest asked from members is higher than the amount of dividends paid to the members. The money a credit union has left over after paying dividends to shareholders is the credit union's money to pay expenses**.
The example below helps to explain how credit unions can pay you dividends and earn money, too.
It's as simple as 1 - 2- 3
1. Johnny A. Member deposits $100
Interest rate - 2.5%
2. Suzy Q. Member takes out a loan
Principal* - $80
Interest rate - 10%
Time to repay - 1 year
3. One year later
| Johnny A. Member's savings account |
|
| Money on deposit |
|
$100 |
| Interest @ 2.5% |
|
$5 |
| Total in account |
| $105 |
| Johnny earns dividends
|
| Suzy Q. Member has paid in full |
| Principal |
|
$80 |
Interest at 10% |
|
$8 |
| Total to be paid |
|
$88 |
Suzy pays interest |
and the Credit Union earns money to pay expenses
| Interest received from loan |
|
$8 |
| Dividends paid to share holder |
|
$5 |
|
| The amount that pays expenses |
|
$3 |
**Expenses are: salary to employees, supplies, etc.
*The principle is the amount of the loan without the interest added.
The examples above were calculated in simple interest.
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