Credit Unions, with their long history of working for their customers instead of solely trying to profit from them, are making news as they seek to enter the high-interest loan market.
Credit Unions are unlike banks, mortgage companies, insurance companies, or brokerage firms. They are often referred to as “the other financial institution,” but they perform similar services to these companies. A credit union can be described as a non-profit financial institution jointly owned by the people who use its services.
With credit unions, members can access the same products and services offered to traditional bank customers, such as loans, checking and savings accounts, and credit cards. Most credit unions have a board of directors to govern the group’s activities and members. They are also non-profit, which means that the aim is to give back to society.
Credit unions compete with traditional banks by offering the same services with lower interest rates and fees. Unlike banks and other for-profit financial institutions, their interest charges and account fees don’t go to shareholders, but they reinvest them in the service they offer.
How do Credit Unions Loans Work?
Many people get personal loans from credit unions instead of banks. They tend to have lower interest rates with few eligibility conditions and quicker application processes. A credit union differs from most other types of lending institutions like banks or payday lenders in that it is a non-profit organization.
Their ultimate goal is not to make money for its stockholders but to provide better services to its members. However, you must first join a credit union to qualify for a personal loan. And, some credit unions only accept members from specific demographics, so check their qualifications before applying.
How can credit unions offer high-interest loans?
Since the mandate of a credit union is to serve its members, it seems dissonant for them to be offering high-interest loans. The complication is that borrowers in that market typically have bad or no credit at all, making their loans relatively high risk.
Credit unions and payday lenders have less strict regulations than banks, so many opt for them. Also, they offer a quicker application process, but online payday lenders generally outperform credit unions in terms of speed and convenient applications. You may acquire your funds within one working day if you choose an online lender.
Payday loans are short-term emergency loans usually offered to people with bad credit and low incomes. The main idea is that you can repay the loan on your next payday, and it is often used in case of emergencies. The only drawback is that payday loans often have high-interest rates.
However, some credit unions have introduced new short-term loan programs as an alternative to a payday lender.
Afena Credit Union’s new product
Afena Federal Credit Union is trying to bridge this gap by offering its members emergency loans ranging from $200 to $2,000. It is only available to less than 80% of the median family income. They also give their members a chance to pay back the loan in small installments.
The repayment terms vary and depend on loan amounts, usually less than $50 per month. They claim to alleviate the financial strain that payday lending places on families. Afena Federal credit union also created a program to assist their members that have fallen victim to high-interest lending businesses
This is not the first attempt by a credit union to enter this market. Several years ago, Vancity, a Vancouver-based credit union, announced emergency cash advances that their members can use until their next paycheque arrives. Their “Fair & Fast Loan” is available to credit union members up to a total of $1,500, and borrowers have the opportunity of repaying the loan over two years instead of the two-month repayment term that most payday loans offer
The biggest advantage is that Vancity also offers low-interest fees. For instance, the claim that a $300 loan with a two-month repayment term would cost $2.20 when it’s paid in two weeks. This equates to a 19 percent interest rate far lower than the roughly 600 percent APR some payday lenders offer.
They describe themselves as “a smarter alternative to a payday lender.” Vancity loan amounts vary from $100 to $2500, and the loan approval is based on income, and it doesn’t require any credit check. You can easily apply online and get the money directly into your checking account. The repayment term varies, and borrowers can customize their repayment periods
Whether this experiment has been a success is an open question. Seven years later, Vancity’s program is still operating but is it truly viable, or does it serve primarily as a marketing angle? According to Dale Evans, a director at quick cash lender My Canada Payday, “Relatively few payday customers would qualify for these sorts of alternative products. In our experience, they have not made a measurable impact on the size of the payday lending marketplace.”
What do we think?
Offering loans to high-risk borrowers at rates below the payday market is a laudable goal. In the past, the excesses of the market have led to significant regulation from both federal and state-level regulators. This has, for the most part, prevented them from egregious practices leading debtors into bankruptcy.
So far, putting this goal into practise appears to have had mixed results. Whether Afena’s entry into the market overcomes the issues that have arisen in the past remains to be seen.