Financial Education Key to Helping Credit Union Members Avoid the Payday Loan Trap
ST. PAUL, MN (July 30, 2013) — Payday loans – typically small, short-term unsecured loans intended to bridge a cash flow shortage between paychecks – are a way of life for many Minnesota consumers. Whether individuals have an established account with a financial institution or not, many consumers view payday lending as a quick fix to an immediate problem, depending on the urgency of their financial situation.
However, when short-term borrowing is done at high (often triple-digit) interest rates, it can quickly turn into a vicious, long-term cycle that is difficult to break. According to the Center for Responsible Lending, 12 million Americans are trapped every year in the cycle of high-interest – often up to 400% – payday loans.
In recent months, the Consumer Financial Protection Bureau (CFPB) has issued a report on payday and deposit advance loans, which also concludes that such products perpetuate the cycle of indebtedness.
Many Minnesota credit unions are positioned to help consumers manage payday loan debt that has been obtained elsewhere – while also offering alternatives to payday lending that allow their members to regain a financial foothold. Because credit unions are not-for-profit financial institutions, their #1 priority is looking out for what’s in their members’ best interest. Credit unions work within their communities to help provide solutions and to educate their members while getting to the root of financial issues that can lead to seeking payday loans.
Northern Communities Credit Union (NCCU) – with locations in Duluth and Virginia, Minn. – puts financial education into practice. NCCU believes that member education – first and foremost – is the best line of defense for members facing financial challenges.
NCCU takes an overall member-centric ”seasons of life” approach when interacting with their members, according to President & CEO Larry Champeaux.
“Every interaction credit union staff has with members involves finding out what’s most important to the member today, whether that’s saving for a child’s college tuition or preparing for their own retirement,” Champeaux said. “Our credit union also makes financial counseling available to members, which helps them qualify to receive additional services and be better-prepared to properly budget and set up a long-term plan.”
Earlier this year, NCCU partnered with LSS Financial Counseling, a service offered through the Minnesota Credit Union Network, to help consumers avoid bankruptcy, foreclosure and debt settlement scams. Working with NCCU and LSS, members receive customized financial wellness plans that meet their unique needs.
Two Harbors Federal Credit Union (THFCU) also works closely with members to help them avoid the payday lending trap. Its new program, “Alternative to Predatory Lending” or APL, is used to assist members who would not normally qualify for an unsecured loan – due to credit, income or other factors – to assist them in an emergency. APL applicants must be a credit union member for at least one month, and there is no application fee. They may borrow $200- $500 at 18% APR with loan terms between one and six months.
“We encourage the member to open a savings account at the time of the loan and encourage a small deposit be made to this savings account each month along with their loan payment to promote savings for emergencies,” said THFCU Vice President of Lending Darla Abrahamson. “Once the loan is paid off, we encourage them to continue to put the previous loan payment money into this account.”
A good example of APL in action involves a THFCU member who had a death in the family, needed money to fly south to attend the funeral and had no financial resources available for this emergency. THFCU was able to finance the plane ticket so the member could be with her family. The member successfully repaid the loan and now has a savings account into which she makes regular deposits.
As part of THFCU’s lending process, its members receive a brief financial review and education on credit scores, loans, balancing their checkbook, and budgeting. THFCU has partnered with GreenPath, a non-profit financial organization that assists consumers with credit card debt, housing debt and bankruptcy concerns.
All of the individualized attention credit unions provide can help their members break the cycle of payday lending.