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A savings and loan association is a financial institution that focuses on providing mortgages to its members, often with competitive interest rates and more lenient lending criteria. Members have voting privileges, but the association’s fortunes are tied to the real estate market and its limited membership base can make it vulnerable during economic downturns. Over time, savings and loan associations have expanded their services to include checking and other basic banking services.
Also known as an S&L, a savings and loan association is a type of financial institution that offers many of the same benefits as a bank, but focuses primarily on using its deposits to provide mortgages to its members. Sometimes called a thrift institution, the savings and loan association is often cited as an example of cooperative banking and offers many of the same benefits as a building society or credit union. Unlike banks, this type of institution is often created with the stated purpose of helping people become homeowners.
With a savings and loan association, both depositors and borrowers are considered members in good standing. They enjoy voting privileges as part of their participation in the organization. Most nations have some form of regulation in place regarding the amount of interest that must be maintained for the organization to meet the criteria to be called a savings and loan, and that amount is sometimes as high as 65%.
There are several benefits associated with a savings and loan association. Historically, financial institutions of this type have offered competitive interest rates to their members, allowing them to obtain a mortgage with more desirable terms. Since many of the decisions regarding mortgages are made by members tasked with reviewing loan applications, members who would have difficulty obtaining financing from banks would qualify under the provisions required by a savings and loan. In some areas, thrifts also have a reputation for being more willing to work with members who are facing sudden adverse circumstances, such as a prolonged illness or job loss that negatively affects their ability to make mortgage payments for a time.
Along with the benefits, there are some potential liabilities with the savings and loan association. The focus on mortgages means that the fortunes of the organization are tied directly to what is happening in the real estate market. If the market experiences a recession that results in property depreciation, this may have an adverse impact on the association. While today’s lending services are somewhat more diversified, mortgages remain a focal point, making the association more vulnerable during an economic downturn. Since a savings and loan association often operates locally or regionally rather than nationally, this limits the potential membership base, a factor that can also negatively affect the organization’s financial stability during an economic downturn.
While savings and loan associations have always provided members with the ability to establish savings accounts, it was only during the latter part of the 20th century that government regulations allowed institutions to provide checking services similar to those provided by banks. . Over time, thrift organizations have become increasingly capable of providing other basic banking services, allowing them to compete more directly with banks to secure clients and accumulate the assets available to provide mortgage services to their members.
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