Short-Term Loans Help Members Break the Debt Cycle
Short-term loans are in demand. According to a recent Wall Street Journal report, payday lender and pawn shop share prices jumped in October. Some credit unions are taking this opportunity to provide similar products, but at a lower cost and with a different philosophy in mind. While payday lenders encourage repetitive short-term lending, credit unions present short-term loans as emergency-only solutions.
Credit unions that offer short-term, high-interest loans valued anywhere from $1,000 to below $500 recognize the product is both risky and low on profits. But they’re on their menus to fulfill members’ needs, and hopefully serve as stepping stones for members aiming to improve their financial situations and move onto lower-cost loan products, CU executives say.
The Lincoln, Neb.-based, $145.2 million Liberty First Credit Union is one of six Nebraska CUs participating in QuickCash, a short-term loan program organized by the Nebraska Credit Union League. The QuickCash loan is a $500 loan that comes with a flat fee of $20, 18% interest rate and pay-back term of 60 days. To qualify, the borrower must have been a member of the credit union for at least 30 days and provide proof of income. A credit report is not required, and there’s no penalty for paying the loan off early.
Liberty First CU CEO Ken Bradshaw said Nebraska’s payday lenders allow customers to refinance or roll over short-term loans, which can spur an ongoing cycle of debt, while QuickCash loans are intended to provide a temporary fix.
“We’ve been wanting to do an alternative to a payday lender loan for a while,” Bradshaw said. “We ran into some members who had good jobs but were getting caught in the payday lender cycle, and they were between $2,000 and $4,000 in debt. I was glad that we could finally sit down and work something out. If we make a little money, fine, but the point is that it helps the community.”
Since Liberty First CU holds its short-term loans on its own books, as opposed to offering them through a CUSO, it faced the challenge of writing its own loan policies and procedures that fall within NCUA’s short-term loan guidelines. To develop the policies and procedures, Bradshaw said he met with another Nebraska credit union, which had created its own short-term loan program and is not participating in QuickCash, for guidance.
Risk is another burden CUs in the short-term loan business encounter, and credit unions that don’t want to assume the risk can sign on with a CUSO, such as XtraCash LLC, a Lenexa, Kan.-based subsidiary of the Mazuma Credit Union-owned CU Holding Company, LLC.
XtraCash currently works with nine credit unions, providing their members with loans that are structured like payday lender products but cost less. The CUSO assumes the risk for the loans and handles all compliance issues. Its CU partners are paid quarterly based on the loan volume generated. The product is also set up to produce some noninterest income for the CUs.
XtraCash Managing Director Lon Neofotist, who spent more than 13 years working in the payday lending industry, said his partner credit unions view short-term loans as vehicles for moving struggling members onto lower cost, mainstream CU loan products.
“There are a number of credit unions that don’t want to offer short-term loans because of the stigma that’s associated with them,” Neofotist said. “But their members are getting these types of loans from somewhere, so they might as well offer them in-house. Hopefully, they can educate their members about how to get out of the cycle.”
Neofotist highly recommends CUs work with a CUSO for their short-term loan programs, as the loans are very high-risk. “My guess is that most credit unions (that carry short-term loans on their own books) either break even or lose, and their members are taking those losses,” he said.
The Orlando-based, $53.2 million Central Florida Postal CU, one of XtraCash’s nine CU partners, signed on with XtraCash to supplement the short-term loan program it already had in place, CEO Jim Weibert said. The CU’s own program offers short-term loans in amounts of $500 and up, and XtraCash’s program serves members looking to borrow less than $500.
Central Florida Postal CU’s in-house short-term loans come with an application fee, an 18% interest rate and a six-month payback term. The CU’s XtraCash loans are paired with two-week payback terms and flat fees instead of interest rates, which amount to less than what payday lenders charge, Weibert said. XtraCash borrowers can use an online application process and are required to bring documentation into a branch for their initial loan applications.
Weibert said while these loan programs do not produce large streams of income for the CU, they allow members to acquire short-term loans at a low cost. Central Florida Postal also provides counseling, which gives recipients of short-term loans a chance to improve their financial situations.
“The last thing we want to do is put them onto one of these loans,” Weibert said. “We want to put them onto a product that will cost less. But if they go to the guy on the corner, his job is to get them that money, and get them to come back again and again.”
He added members can view a short-term loan as an opportunity to prove they may be ready to take on a traditional credit union loan once the initial loan is paid off.
“If a member can demonstrate to me that they can pay back a short-term loan, that might be what I need to hear to put them onto one of our lower cost products,” he said.