Credit Unions Alternative to Payday Lending Provides Financial Relief/Education
By Gina Ragusa Credit Unions Online
Members are finding refuge in credit union alternative payday loans when they are short on cash and need money fast. Instead of paying exorbitant interest rates to a payday lender, they seek a low-cost alternative with their credit union.
In the past, members had no choice but to turn to a payday lender if they lived paycheck to paycheck and money did not stretch far enough between pay periods.
Once the consumer jumped on the payday loan treadmill, they were caught up in an unstoppable cycle of skyrocketing interest rates. In fact Consumers Union, a nonprofit publisher of Consumer Reports says that interest rates for loans as low as $100 to $300 can range from 212% up to a staggering 911% with a payday lender.
Within the last several years government officials have cracked down on this kind of predatory lending, often restricting any type in certain states. While payday lending continues to "stink up" the lending landscape, many credit unions have created an alternative program to provide financial assistance--while instilling financial literacy and savings.
NCUA Provides Guidelines for Credit Union Payday Loans
NCUA stepped in to ensure member safety and quality due to an increasing number of credit unions offering payday alternative loans. Last fall NCUA (National Credit Union Administration) set the rate cap for credit union payday loans at 28% (up from 18%) and specific guidelines, which include:
Credit union must allow at least one month for the member to repay the loan
Members cannot take out more than three of these loans within a six-month period
According to NCUA Chairman Debbie Matz, the organization took great pains to ensure that payday loans would remain a viable and reasonable resource for members. "We spent a long time trying to do this in a way that would work for members and for the credit unions and not be predatory."
Currently more than 500 federally insured credit unions offer payday loan alternatives with interest rates hovering under 20%.
Credit Union Programs Generate Member Interest
Wright-Patt Credit Union's SVP/Chief Lending Officer, Tim Mislansky says that his credit union started offering StretchPay line of credit because executives saw the desperation in community members' eyes. "In 1999, our CEO attended a community meeting about predatory lending. Toward the end, one person stood up and said that we couldn't get rid of payday loans because it was the only way he could get a loan when he really needed one."
At that point Wright-Patt decided to offer a reasonably priced alternative with the goal of breaking the cycle. The program launched in early 2000 and the credit union saw an instant reaction.
Mislansky reports having approximately $1 million on the books in StretchPay LOC at any time. "We have a lot of habitual users and typically have about 1,000 active on books. On average, we take about 200 applications per month."
State Employees' Credit Union has had a similar response to its Salary Advance Loan. Phil Greer, SVP/Loan Administration says that his credit union has loaned $2.7 billion since starting the program in 2001 and says the program has saved members a tremendous amount of money.
"We made 100,000 advances in May alone for over $37 million---we ended up saving the collective membership $7 million for the month they would have paid to a payday lender vs. $500,000 in fees to the credit union."
Wright-Patt's StretchPay LOC has an 18% interest rate and State Employees' Credit Union charges $12.
Credit Union Loan Savings Component May Break the Cycle
While credit unions are charging considerably less for payday loans, many in the industry have taken the product further to promote and encourage positive financial behavior.
Within recent years, both Wright-Patt and State Employees have added a mandatory savings account component to its version of the payday loan. Both Mislansky and Greer have found that this "forced savings" component is teaching members how to start a back-up plan and the value of savings.
Mislansky says, "The fact that we've been able to roll members over to a regular savings and loan program is evidence that a lot of members, once forced into savings, find they like the comfort of having that savings account."
Greer explains that his credit union team braced themselves for a backlash when it introduced the savings account component. "Initially, we thought members would be unhappy, but quite the contrary. We found that members liked having savings...members who never had savings before, liked having a savings account. Plus they earn interest on the savings account....works out to be win/win for everyone."
Both credit unions have strict rules and guidelines that members must follow if they want to continue participating in the program, such as paying off the loan before obtaining a new one and concrete proof the member has the ability to repay the loan.
Mislansky and Greer both contend their credit unions have had charge offs, but the benefits of the product outweigh the nominal losses.