Opinion

Felix Salmon

When credit unions replace payday lenders

By Felix Salmon
August 5, 2009

USA Today is doing something quite bloggish, it seems. On Monday, Sandra Block put up a 470-word story headlined “Some credit union loans are not a good deal”, which singled out some credit unions for predatory practices. But she got some useful feedback from credit unions and their customers, and on Tuesday Block’s 720-word column appeared, under the headline “Some short-term credit union loan rates may be high”, and taking a more measured stance.

Here’s an early graf on Monday:

In recent years, hundreds of credit unions have introduced short-term loans for members who face a temporary cash crunch. But some of the loans “are only marginally cheaper than traditional payday loans,” says Lauren Saunders, an attorney with the National Consumer Law Center.

And here it is again on Tuesday:

Ideally, a credit union loan should offer a low-cost alternative to a payday loan, and many do. But before you sign up, scrutinize the details. Some credit union loans “are only marginally cheaper than traditional payday loans,” says Lauren Saunders, an attorney with the National Consumer Law Center. Other credit unions have lent their names to third parties that are offering payday loans, the NCLC says.

There are two things I like here. Firstly is the fact that Block is now making it clear that many credit unions really do offer a low-cost alternative to payday loans. And secondly is the fact that she was happy to revisit and republish her story with more detail and nuance, instead of taking a defensive I-stand-by-my-story approach.

There’s one thing I don’t like, however, which is that Block doesn’t give a good example of what a payday-loan alternative should look at. She’s good at the horror stories, of course, but in the interests of balance she should have featured a much more consumer-friendly product as well.

Block did, on Tuesday, eliminate entirely the worst-offending credit union from the Monday column, Nevada Federal Credit Union:

Nevada Federal Credit Union says it offers a 0% annual percentage rate. Brad Beal, president of the credit union, says it charges an application fee of $70 for a 14-day loan of up to $700, or $60 for members with direct deposit. That’s half the fee charged by the average payday lender, he says. But the National Consumer Law Center points out that a $70 application fee for a $400, 14-day loan is the equivalent of a 455% APR.

The 0% APR is a bait-and-switch teaser, and is pretty evil. And what is the implicit interest rate on a 14-day $400 loan which costs the borrower a total of $470? The APR calculation formula does indeed come up with 456%, but that has no embedded compounding: it essentially assumes that you might refinance $400 every 14 days, but that you pay the $70 in cash. I look at this loan, instead, as carrying a 17.5% nominal interest rate over a 14-day period. Since there are 26 14-day periods in a year, the annualized interest rate you’re paying is 1.175^26, or 6,622%.

In any case, let me redress the balance here a little and share the terms of the payday-loan alternative that my own credit union, LES People’s, offers.

  • The minimum loan is $100; the maximum is the lower of $500, or 50% of net monthly pay.
  • The duration of the loan is four pay cycles. Most people get paid twice a month, so that means two months; Social Security checks, however, are paid monthly, so for people on Social Security it’s four months.
  • The interest rate is 10% per year.
  • There is an up-front fee as well: 10% of the total amount of the loan, up to a maximum amount of $25. We refund $10 of the fee if the borrower participates in some form of financial counseling after taking the loan.
  • There are no late fees.
  • In order to assure repayment, we generally ask that the borrower has their paycheck directly deposited into their account, although we can make exceptions.
  • No more than two of these loans per year: if you want anything more than that, you need to get a proper personal loan.

Nevada FCU’s president, Brad Beal, told Block that he wasn’t taking advantage of his members with his $70 fee, and that such loans indeed were “economical” for his members. I don’t know the specifics of his credit unions finances, but I don’t believe him. We at LES People’s don’t make a lot of money from our emergency loans, as we call them, but these loans do provide a useful service for our members, and help prevent them from going instead to predatory payday lenders. Since we’re owned by our members and operate in the service of our members, that’s exactly what we should be doing. I don’t have numbers to hand, but I hope and trust that most credit unions are more like us than they are like Nevada FCU.

Comments
18 comments so far | RSS Comments RSS

I see nothing wrong with this, people choose to take these loans out. But its clear that Felix should determine the lending practices of financial institution and what ability people have to bank with them. Felix the knower of all things, but the producer of none.

Posted by Terry | Report as abusive
 

Felix-

Is your issue that the $70 fee masks a ridiculously high interest rate OR that the ridiculously high interest rate exists at all? In other words, would you be OK w/ the product if it was advertised the ridiculously high interest rate (be it 456% or 6622%)?

Posted by Dave | Report as abusive
 

Felix -
Do you have any links or other pointers on how to start a community bank like LES Peoples? I’m involved in a community group and would like to propose starting one, but not sure where to start.

 

Felix, in your infinite wisdom, would you please tell us how much it SHOULD cost to borrow $400 for two months? Remember, as a business owner you have to cover the fixed costs of making the loan, including all the paperwork, and the costs of collection and possible default.

Posted by ed | Report as abusive
 

Why is there a fascination among the media over triple-digit APR for short-term loans? It’s a two-week loan, yet you are calculating interest by 52-weeks, which only magnifies the rate to create these astronomical numbers. It’s like quantifying a baseball pitched at 100 mph. It doesn’t travel an hour, or a mile, but we use this extended measurement to quantify a short span. And, on APR. And, as Ed noted, you can’t charge less and run a business.

Posted by Ryan Harris | Report as abusive
 

Jesse, start here:
http://www.natfed.org/

Posted by Felix Salmon | Report as abusive
 

Ed, the product at LES People’s does not cost its shareholders/members any money. So that’s a good baseline.

Posted by Felix Salmon | Report as abusive
 

I would have thought you’d have told us exactly the APR for the LES People’s loan, including the fee: for $100, 152% minimum; for $500, 31% minimum. For $100, 313% maximum. Assuming compounding of the fee and interest, and assuming the 10% APR is calculated as 1.6666% over two months.

Posted by secretivek | Report as abusive
 

“But its clear that Felix should determine the lending practices of financial institution…”

Maybe not Felix but somebody should. It’s all of us bailing them (financial institutions) out, so I think we have a say if not the right to dictate.

Posted by a | Report as abusive
 

I think we should be more worried about the “Cash Cows” of the world. Credit unions historically are people helping people and are non-profit. They do, however, have to cover costs so they price their products accordingly. In the instance of the 0% loan and $70 applicaton fee issue, my take is the loan losses in this product far exceed any “profit”.

Posted by M McCaskey | Report as abusive
 

secretivek, using the official APR calculator, the maximum APR would be for a $100, 2-month loan going to someone who does not accept financial counselling. That would work out at 70%. The minimum APR would be for someone being paid monthly, taking out a $500, 4-month loan, and accepting financial counselling. In that case, the APR is 18.9%.

Posted by Felix Salmon | Report as abusive
 

I would like to invite you to our National Hard Money Conference on hard money lending, Mortgage Brokers success, REO’s, mortgage pools and much more. Held in Las Vegas at the Rio Hotel, September 3rd.

Investors, Brokers, Private Lenders and Real Estate Developers from around the country will be attending this once in a lifetime event.

It’s billed as the largest hard money conference in the country.

September 3rd, Rio Hotel – Las Vegas

 

Great piece, but something to keep in mind: customers deserve choices and do not want others making financial choices for them. Credit unions may be the best option for some people, but research has shown that consumers are harmed when payday lending is no longer an option.

A report by the FDIC found that bank and credit union overdraft fees have APRs ranging from 1067% to 3520%. Due to their status as not-for-profit financial institutions, credit unions in the United States are exempt from federal and state income taxes. They do not have to pursue a profit. And the majority of Americans do not have access to a credit union, as their membership is restricted to defined segments of the population.

Payday lenders welcome the entry of credit unions into the short-term credit advance market. Competition is good for consumers and will help mainstream the payday advance product, forcing more lenders to follow high operating standards.

Posted by Payday Lender | Report as abusive
 

What is often missing from these types of articles and their subsequent discussions is that payday lenders are offering unsecured loans.

When a payday customer defaults on their loan, the payday lender has limited recourse compared to home loan lenders, auto loan lenders or consumer product lenders.

Payday lenders assume much of the upfront risk that banks and credit unions don’t.

Posted by Aric V | Report as abusive
 

A hard reality of America is that employed, well-meaning Americans sometimes fall short of cash between paydays and research shows that efforts to prohibit or limit the supply of products in this market hurt consumers.
Millions of customers across the country have used payday advances responsibly and appreciate having somewhere to turn when they need quick access to credit. Analysts estimate payday advances were used by 19 million households in 2008.

Posted by pwnbkr | Report as abusive
 

If credit unions are offering low cost short-term loan options, that’s great, but what about the LARGE segment of the population that isn’t tied to a credit union. I don’t think you can throw the baby out with the bathwater here. Sure, there are some payday lenders that are operating illegally and should be avoided, but then there are some regulated enterprises that really are offering consumers a chance to avoid more serious financial troubles.

Posted by Thoreau | Report as abusive
 

WOW! The “APR” listed for Nevada Federal CU is HIGHER than Ohio’s old payday lending act. Consumers/Coalition for Responsible Lending were upset over this “APR” (which was a fixed %15 on every $100 borrowed) so came HB 545 that was passed in Ohio last November. PD Lenders brought up the credit union fees during the hearings but were told that was not accurate by our legislatures!

Posted by Jennifer | Report as abusive
 

There is so much to learn about credit unions. I have heard the good and the bad about them. I am moving out to Oklahoma City and I have been told to do some research on credit unions in OKC because they can be really helpful.

Posted by margomccann | Report as abusive
 

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