Also known as an S&L, a savings and loan association is a type of financial institution that offers many of the same benefits of 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 a 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 full members. They enjoy voting privileges as part of their participation in the organization. Most nations have some type of regulations in place regarding how much interest must be maintained in order for the organization to meet the criteria for being called a savings and loan, with that amount sometimes being as much 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, making it possible for them to obtain a mortgage with more desirable terms. Since many of the decisions regarding mortgages are made by members charged with the responsibility of 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, thrift institutions also have a reputation of being more willing to work with members who face sudden adverse circumstances such as a prolonged illness or job loss that negatively impacts 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. Should the market experience a downturn that results in the devaluation of properties, this can have an adverse impact on the association. While the lending services today are somewhat more diversified, mortgages remain a focal point, making the association more vulnerable during an economic recession. Since a savings and loan association often operates locally or regionally rather than nationally, this limits the potential membership base, a factor that may also negatively impact the financial stability of the organization 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 governmental regulations allowed the institutions to provide checking services similar to those provided by banks. Over time, thrift organizations have incrementally become able to provide other basic banking services, allowing them to more directly compete with banks in securing customers and building up the assets that are available to provide mortgage services to their members.