Building and loan association

3 key takeaways

• Building and Loan Associations focus on providing home mortgages and real estate loans to their members.
• They operate as member-owned cooperatives, with profits typically reinvested into the association or distributed to members.
• These associations promote home ownership and financial stability within communities.

What is a Building and Loan Association

A Building and Loan Association is a financial institution that offers savings and loan services primarily for residential real estate transactions. Historically prominent in the United States and the United Kingdom, these associations collect savings from members and use those funds to provide mortgage loans to other members. The core mission of Building and Loan Associations is to promote home ownership and provide affordable financing options for purchasing homes.

Importance of Building and Loan Associations

• Affordable Home Financing: Provide accessible mortgage loans with competitive interest rates.
• Community Focus: Promote home ownership and financial stability within local communities.
• Member Benefits: Profits are reinvested or distributed to members, enhancing financial returns for savers.
• Financial Education: Offer resources and guidance on home buying and financial management.

How Building and Loan Associations work

Membership and Savings

Members of a Building and Loan Association typically join by opening a savings account or purchasing shares in the association. These savings are pooled together to create a fund from which loans are issued. Members benefit from competitive interest rates on their savings, which are often higher than those offered by traditional banks.

Loan Issuance

The primary service provided by Building and Loan Associations is the issuance of mortgage loans. Members apply for loans to purchase homes, and the association uses the pooled savings to fund these loans. The interest paid on these mortgages generates income for the association.

Profit Distribution

As member-owned cooperatives, Building and Loan Associations distribute profits among members. This can take the form of dividends on shares, higher interest rates on savings, or lower interest rates on loans. The focus is on benefiting the members rather than maximizing profits for external shareholders.

Examples of Building and Loan Associations

• Local Housing Cooperatives: In a small town, a Building and Loan Association helps local residents purchase homes by providing low-interest mortgages funded by member savings.
• Community Development: An urban Building and Loan Association partners with a local government to offer affordable housing loans, promoting revitalization in underserved neighborhoods.
• Member Dividends: A rural Building and Loan Association distributes annual profits to members in the form of dividends, enhancing their financial returns and encouraging continued savings.

Real world application

Building and Loan Associations have played a pivotal role in increasing home ownership rates, particularly in the early to mid-20th century. For example, during the post-World War II housing boom in the United States, these associations provided millions of Americans with the financing needed to purchase homes. A typical scenario might involve a young couple saving money with their local Building and Loan Association, which then provides them with a mortgage loan to buy their first house. The interest they pay on the loan helps fund future loans for other members, creating a cycle of home ownership and financial growth within the community.

In contemporary times, some Building and Loan Associations have evolved into larger savings and loan institutions or have merged with banks, but their fundamental mission remains the same. For instance, a modern Building and Loan Association might offer online banking services to reach a broader audience while still focusing on home loans and member benefits. These institutions continue to support community development by making home ownership more accessible and promoting financial education and stability among their members.