Many Credit Unions Offering Payday Loans

By: Javi Calderon
Many Credit Unions Offering Payday Loans

Unmarred by the profit-hungry practices of traditional banks, credit unions have enjoyed the reputation of being the most trusted and user-friendly banking option by the most prudent and conservative of consumers.

To combat the bad rap of the payday loan industry, many credit unions have begun offering short-term credit loans carrying interest rates far higher than their typical products.

As of September 2010, the National Credit Union Administration approved a 10% cap raise (from 18% to 28%) for guideline-specific payday loans. Unions are allowed to charge a $20 dollar application fee, but must allow an entire month for payment, and can only extend three loans to a specific customer per six-month period.

Interestingly, these figures amount to a 100% annual percentage rate, which would be considered “usury” by industry critics. Across the country states have been approving a 36% APR cap for payday loans, a rate industry experts say is purposely putting cash advance stores out of business. Apparently, Credit Unions agree.

In fact, one Utah Credit Union was offering five-day $100 dollar loans at a price of $12, amounting to an annual percentage rate of over 800%.

The change in lending practices comes as NCUA has determined that over 7% of their outlets are likely to fail. Operating as non-profit organizations, Credit Unions are struggling in an economy that is remaking itself after the recession of 2007-2008.

NUA argues that their change in policy is an attempt to offer consumers a “safe” avenue for short-term credit. However, in a time when business is struggling, the profits of payday advance loans – lenders extended $40 million in credit last year, for a return of over $7 billion – it's hard to image the move as anything other than a fiscal decision for self preservation.

Most Credit Unions who offer payday loans (around 500 nationwide) do so outside of the newly approved program, meaning they are still subjected to the 18% limit.