The Irish League of Credit Unions has defended its loan system following last week's Family Money article which pointed out that, in a low interest rate environment, banks were now charging lower rates than the credit unions.

The league's general secretary Mr Tony Smyth says that credit unions, which operate as individual co-operatives within the community, give back surpluses - the difference between the institution's cost of loans and its income. This amounts to between 10 per cent and 20 per cent of interest paid, he says.

This interest rebate scheme is not reflected in the commonly quoted credit union rate of 1 per cent per month, an APR (annual percentage rate) of 12.68 per cent, he says.

Mr Smyth says the APR is a compound interest calculation and overstates the credit union movement's simple interest rate scheme.

Loans charged on a simple interest basis means that the lender only pays interest on the outstanding amount borrowed, compared to the banks' compound interest scheme where the charge is calculated on the original amount plus any interest that has accrued in the meantime.

The effective rate on a £1,000 loan is 6.25 per cent. "Any comparison should be on the basis of the cost per £1,000 and the type of loan involved. Personal lending in banks and building societies is still quite high," he says.

Taken in isolation, this 6.25 per cent rate per £1,000 is being matched by some financial institutions for term loans in some instances, but a credit union's interest rebate would lower that further. Savers, or shareholders, get a good return on their shares so the savings aspect of the movement is not suffering, says Mr Smyth.