What Is Cost Of Funds?
(dividends paid to members)
+ (interest paid on borrowed money)
÷ average outstanding shares and borrowings
The credit union cost of funds correlates directly with the federal funds rate. The federal funds rate is expected to increase throughout 2018 and has increased six times since December 2015.
As the fed fund rate increases, the cost of fund ratio increases for credit unions. A lower cost of funds allows credit union borrowers to take out loans with lower interest rates. With every rate hike, the interest rates on loan products increase; however, members also have access to deposit accounts that offer higher interest rates.
Cost of funds is an important metric in daily credit union operations — answer the questions below to test your knowledge.