Fifty-four Texas credit unions will soon have a turnkey payday loan alternative product thanks to the National Credit Union Foundation's REAL Solutions program and the Texas Credit Union League.
The new product will be launched in participating credit unions on March 30, the league said, after the CUs have trained their staff in how to "sensitively" offer the product.
"Our goal is to keep more money in the hands of the borrower," said Natasha Melugin, REAL Solutions program director for the Texas league. "Hundreds of payday, auto title and other small predatory lenders litter our streets, preying on financially distressed consumers. These 'rescue' loans intended to bailout the borrower in fact keeps them in a vicious debt-cycle."
Unlike most payday loans available in Texas, the new loan products will carry a much lower interest rate at 18%. The loans will also offer a longer repayment term than other payday loans and require the borrowers to deposit 10% of the loan amount in a savings account.
The league reported that 60% of payday loan borrowers in the state repeatedly roll over their loans. In many cases, borrowers will wind up paying more in fees and interest than the original loan amount, the league said.
The NCUA has cited both the lower interest rates and the longer repayment terms as key elements of payday loan alternative products that the agency finds acceptable for credit unions to offer.
Researchers have found that requiring a savings component to a payday loan program can limit demand for the loans, but Melugin defended the savings component, noting that credit unions were seeking to help their members manage their longer term money needs as well as their shorter term ones.
"Far too many Americans live paycheck to paycheck without any emergency fund to fall back on. Without this safety net, an unexpected event like a costly car repair or a major medical expense could put them in financial tailspin," Melugin said. "All consumers should have the opportunity to advance economically. By incorporating a forced-savings component we are hoping to create a positive savings habit with borrowers [and] minimize their usage of short-term loans."
Credit unions will be able to name the payday loan alternative product what they like but will have to use a common tag line that the participating CUs will have a chance to vote on in a meeting later this month, the league said. The league also offers REAL Solutions products that CUs can use to help their members access better financial education and get the most from filing tax returns through the earned income tax credit program.
The financial education component, Debt In Focus, is an "online tool developed by the Filene Research Institute that allows credit union members to anonymously enter all the details of their financial life and receive specific, detailed budgeting, plans of actions, and helpful tools for reducing their debt and improving their finances," accordingto Mike Delker, vice president for credit union relations for the league.
Delker said the league hopes the combination of the payday loan product and Debt In Focus will help the league grow the number of Texas CUs participating in REAL Solutions by 50% by the spring of next year. A spokesman for the league said Texas CUs have responded enthusiastically to the program, but the league has sought to grow it slowly to make sure participating CUs have the tools they need to implement REAL Solutions.
"Of course the long-term goal is expand REAL Solutions across the state, but we realize we must manage this growth. It does require long-term commitment from the credit union to be successful in serving our state's unbanked, underbanked and underserved markets," said league spokesman Linda Webb-Manon.