WATERLOO, Iowa -- To stop what some critics consider a vicious and exorbitant trap found with many payday loans, Veridian Credit Union is launching an alternative that not only provides emergency cash, but helps users save for the long term.
Starting March 1, the $1.1 billion CU will offer its Payday Alternative Loan. The PAL is a loan up to $1,000 and a repayment term of up to six months. The most distinguishing factor of the PAL is that a savings account is also established as part of the process. When an individual requests a PAL, the amount requested is automatically doubled. For example, if an individual requests $500, the loan amount would be for $1,000. The additional $500 would be deposited into the borrower's savings account and held until the loan is paid in full. Both the repayment term and the savings component allow individuals to break the cycle of constantly renewing a loan.
To qualify for a loan, individuals must provide proof of income, such as a pay stub or account statement. Paychecks are required to be direct deposited to a Veridian account. Payments on the loan must be made every payday (weekly, biweekly, semi-monthly or monthly), and borrowers are encouraged to make their payments through automatic transfers. In fact, the interest rate is reduced from 21% APR to 19% if individuals choose to take advantage of automatic transfers.
"By including the savings component in the PAL, we are meeting the immediate needs of our borrowers, while helping them develop healthy savings habits," said Jean Trainor, president/CEO of Veridian. "The savings account allows an individual to better plan for future expenses."
Veridian's new product comes as Iowa's House and Senate are considering legislation that would cap the interest rate on car title loans--one common form of payday lending--at 21%. A cap on interest rates for these businesses could force them out of the state, and legislators want to know what other options consumers will have once that happens, according to the CU. With lenders charging 390%-780% APR, some borrowers are susceptible to falling into the pattern of repeat loans, critics say.
The original purpose of a payday loan was for a one-time emergency situation; however, according to a study conducted by the Center for Responsible Lending in 2003, 91% of all payday loan users have five or more payday loans per year, Veridian said. "Fees for payday lenders generally run between $15 and $30 per $100 borrowed," Trainor said. "Those large fees make it extremely difficult for someone to pay back a loan in a reasonable amount of time. The PAL is designed as an affordable alternative."
Last August, the $523 million University of Iowa Community Credit Union rolled out its PAL program. So far, 50 individuals have used the loan/savings product, said Steven Quigley, senior vice president of retail sales. UICCUS's PAL is similar to Veridian except borrowers have up to 12 months to pay off the loan. Quigley wanted to see for himself what a payday lending operation looked like. One day last year, he visited a branch of one of the nation's larger companies and was amazed at the speed of cash distribution.
"It takes just two things--how much do you make and do you have a checking account and you can walk out the door in minutes with up to $445," Quigley said. "I said to myself we have to do this but the difference is we want to educate people and help them save."
Indeed, a number of credit unions have stepped up their efforts to offer another choice to payday loans including $28 million Baker Federal Credit Union, which recently launched its "Hold-Over" Loan. The loan offers a lower interest rate with a savings plan rolled into it so that at the end of a five-month term, users will end up with more than $200 in a savings account. --firstname.lastname@example.org