Credit union offers payday lending alternative
November 14, 2006 - Las Vegas, Nevada
When officials at Nevada Federal Credit Union found out a quarter of its members frequented payday loan businesses when running short on cash, they decided it was time to offer an alternative.
"We're trying to help them get out of the payday loan cycle," said Brad Beal, Nevada Federal president. "We thought, we need to step in here and offer this at a lower cost. They need to have a means to get out of the cycle."
So that's when Nevada Federal, which has 83,000 members, started offering what they call ADVANCpay, the payday lending alternative. The two-week, maximum $500 loan is available to members for a one-time $40 fee.
More and more credit unions across the country are offering payday-style products to members.
Many offer the same service -- payday advances -- with low APRs, savings requirements, or financial education components.
"We think it's great," said Sharon Reuss, a spokeswoman for North Carolina-based Center for Responsible Lending. "Ultimately it's about helping members because if members are in bad financial shape, it's not benefiting the credit union."
And when some payday loans can have up to 400 percent APR, Reuss said borrowers need all the help they can get staying out of that debt cycle.
"We think that's much preferable to triple digit interest rates," said Reuss.
Beal said Nevada Federal's product works similarly to traditional payday loans.
"Except we charge far less than the payday lenders charge," said Beal.
He said the credit union found a few years ago, when they were surveying members to see how many were using payday lenders, that payday businesses usually charge more than $80 for a $500 loan.
And if borrowers can't pay back the loan in two weeks, payday lenders will allow them to roll over the loan for additional fees and interest.
"With payday loans, people get trapped. Every payday they're broke. You can't get out," he said. "We wanted to offer our members an opportunity to break the cycle."
To ensure that members didn't run into the same problems repaying their ADVANCpay loans that some people do repaying payday loan, Nevada Federal created 18-month, 18 percent Break the Cycle loans.
Available to any member who uses ADVANCpay, the product is available along with financial counseling and education to help members with monthly budgeting and financial planning.
"There's a huge segment of the market out there who don't manage their finances as well as they might. If you look at the number of payday lenders up and down the street you can see that," said Beal. "And we're trying to help them."
The Credit Union National Association has taken no official position on their members offering payday-style products.
"Payday lending, for better or worse, is used by a number of people who are outside of the financial services mainstream," said CUNA spokeswoman Katye Long in an e-mail. "Credit unions perceive offering an alternative as getting these folks in the door, and then introducing them to more traditional financial services that can save them money over the long run."
But not all credit unions are on board with the payday alternatives.
The 37,000-member Clark County Credit Union is sticking to what it's always done -- cover bounced checks and charge members a single insufficient funds fee.
"We're not trying to gouge people. Everything we do is for the member," said Mark Andrews, vice president of marketing for CCCU. "We don't think payday lending is a good thing for borrowers. It's an act of desperation."
Instead, Andrews said his credit union offers old-fashioned personal loans.
He said members can often receive approval within the same hour, and always within the same day.
But he said some members still turn to payday lenders, again out of desperation.
"Part of the motivation may be.... that they don't want to confess that to their financial institution," he said. "When we see that the traffic is going to the payday loan company we (talk to the member) gently and confidentially."
Members at CCCU can meet with a loan counselor, instantly pay off their high-interest loan, and "transfer it to something that's more amenable to a household budget," said Andrews.
His credit union considered offering a payday loan product, but decided it wasn't in the best interests of the member.
But according to Community Financial Services Association of America, the payday industry organization, there is clearly a demand for services from the 22,000 locations nationwide. Payday lenders make $40 billion in loans yearly.
Lindsey Medsker, a spokeswoman for CFSA, said the industry welcomes credit unions.
"Competition is good for consumers and helps mainstream the payday advance product. As the product becomes more mainstream, the perception of the industry is likely to change," she said.
Medsker said credit unions have begun to offer the products because they realize how many members were turning to payday lenders.
Credit unions do have one advantage, though: their non-profit status.
Because credit unions aren't in business to make money, they may be able to undercut for-profit lenders.
Dennis Bassford, chief executive of payday lender Moneytree, said he thinks the additional competition is great.
He said the industry has seen a minimal effect in Washington state, where Moneytree is based, from credit union products, but he expects the move will be a boon in the end.
"What it does is reaffirm the need for this type of short-term credit in the marketplace," said Bassford. "People who use payday loans have accounts with banks and credit unions. So they're people who already have a banking relationship. The reason they come to us is that they're not having their needs and demands for short-term credit met.
And he said it will drive the payday loan industry to be more creative about the products it offers.
CFSA's Medsker said the market has yet to feel the effects of credit union competition nationwide, especially since few are promoting their products. Even when the products are offered more widely, however, Medsker said she doubts credit unions will ever take the place of the traditional payday loan.
"One thing many credit unions are doing is they require a certain amount of the loan to go into a savings account," or require weeks of credit counseling, she said. "For people who just need $200 between paychecks, they don't have six weeks to go through financial education before they get a loan."
In Business Las Vegas, Phoebe Sweet, Staff Writer
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