Credit Unions New Payday Loan Lenders

Credit Unions, which are non-profit financial institutions not allowed to raise capital in the way a traditional bank can, are now allowed to offer payday loan ‘alternatives’ but some say that offering high interest loans doesn’t match with the general spirit of credit unions.

In September, the National Credit Union Administration raised the annual interest rate cap to 28 percent from 18 percent for credit unions that offer payday loans that follow certain guidelines. Under this voluntary program, credit unions must allow at least one month to repay, and cannot make more than three of these loans to a single borrower in a six-month period.

But because these firms can charge a $20 application fee for each new loan, the cost to borrow $200 for two months translates into an annual rate of more than 100 percent.

At Mountain America Federal Credit Union in Utah, a five-day $100 “MyInstaCash” loan costs $12, which works out to an 876 percent annual interest rate. An iWatch News investigation found 15 credit unions that, like Mountain America, offer high-cost loans that closely resemble traditional payday loans.

“They are promoting these loans as payday alternatives, but they are not really alternatives; they are egregious payday products,” said Linda Hilton, a community activist in Salt Lake City. “We look at it as a moral lapse of credit unions.”

While the spirit of the change may be to offer payday loan alternatives, the way it is implemented may be much more predatory than the average payday lender, despite the lower interest rates and other limits. When a consumer enters a credit union there is a certain level of trust and respect present. Because of their non-profit status many perceive credit unions as the altruistic cousin of big banks and other profit driven financial enterprises. Because of this perception, many debtors may be even more vulnerable to predatory type lending from credit unions simply because they aren’t expecting it and don’t have the radar up.  Credit Unions offering these payday loan alternatives should be required to disclose in clear language just how much the loan will cost.

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