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Credit unions offer alternative to costly payday loans

By Dan Petrella/CU-CitizenAccess "“ A few local institutions do offer alternatives to payday loans at a significantly lower cost.

Central Illinois Credit Union, which has locations in Champaign and Urbana, has been offering a "payday alternative loan" to its members since 2005, when its president, Cheryl Merkel, saw a group of UI law students present a report they had written about similar products at other credit unions across the country.

"They did all the legwork for me," she said. "Why wouldn't I do this?"

 

 

The loans, which are capped at $300 for first-time borrowers, have an interest rate of 21 percent and a $20 processing fee. With the fee taken into account, the annual interest rate on the loan is about 34 percent.

"We wanted it to be enough to cover our risk, but we didn't want to take advantage of people," Merkel said.

This loan product falls within the guidelines recommended by the National Consumer Law Center in its report, "Stopping the Payday Loan Trap: Alternatives that Work, Ones that Don't," which was released in June. One of those guidelines is a cap on interest with fees of 36 percent.

To be eligible for the loan at Central Illinois Credit Union, customers must be members of the credit union for six months before applying for the loan, have a monthly income of at least $1,000 and be employed at their current job for at least six months.

Merkel and the board of directors were initially concerned about the risk involved in offering these loans, but she said they have proven to be one of the products that generates the most income for the credit union.

Last year, the credit union made 350 payday alternative loans. It has already made more than 300 such loans this year.

While the payday alternative loans are slightly outside the core mission of a credit union, which is to encourage thrift, Merkel said, "there's a certain group of people [for whom] this is a great deal."

Given more time and resources, Merkel said she would like to offer more education for members to help them avoid needing emergency loans altogether.

"We just get them over the hump so they don't go to the payday loans and get buried," she said.

Community Plus Federal Credit Union offers a similar product.

"We refer to the product as an emergency loan because that's what it needs to be for, you know, someone has all four tires out on their car," President Mike Dougherty said.

The credit union began offering the loans around the same time as Central Illinois Credit Union, and Dougherty and Merkel worked closely on developing the products.

Community Plus also requires customers to be member for at least six months before taking out an emergency loan.

Unlike Central Illinois, which gives members cash, Community Plus writes a check to whoever the member plans to pay with the money being borrowed.

Emergency loans at Community Plus have an interest rate of 18 percent, which is the limit for federally chartered credit unions. They also carry a fee of $20 for loans of $250 or less and $40 for loans greater than $250 up to $500. Depending on the size of the loan, the interest rate with fees can exceed the 36 percent cap recommended by the National Consumer Law Center.

For example, a member who borrows $300 from Community Plus would end up paying $67 in interest and fees over six months, which is equivalent to an annual interest rate of about 45 percent.

The loans haven't proven to be an income-generating product for Community Plus, Dougherty said, adding that they just about break even.

"We didn't get into it with the intention of making money. We got into it to give our members an alternative to payday lenders, title lenders and things like that," he said.

The Consumer Financial Services Association of America, a trade ground for payday lenders, says credit unions are able to make these loans because they are not obligated to make a profit.

"Due to their status as not-for-profit financial institutions, credit unions in the United States are exempt from federal and state income taxes and so are subsidized by the government," the group's website says. "They do not have to pursue a profit. This gives them a clear competitive advantage over for profit companies."

Both Daugherty and Merkel pointed out that their products aren't a solution for someone who needs money right away and doesn't belong to their credit union.

"When somebody needs money today, there aren't a lot of good options out there," said Kathy Sweedler, a consumer and family economics educator with the University of Illinois Extension.

For people in desperate situations, Sweedler recommends contacting First Call for Help at (217) 352-6300 or other social service agencies before turning to high-cost lenders.

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