So What's Replacing Boarded-Up Payday Lenders? Credit Unions!

Consumers in Washington D.C. have apparently flocked to credit unions since the district outlawed payday lending last year. Payday lenders whined that lending without 300% APRs was utterly unaffordable, but credit unions are proving that it’s possible to make long-term, low-dollar loans with interest rates as low as 16%.

The credit unions’ products vary, but generally they are loans of $300 to $1,000 with an annual percentage rate of up to 18 percent. Unlike payday loans, in which borrowers sign over part of their next paycheck for the cash advance, the credit unions’ new products have longer terms, from thirty days to a year.

Vann, 43 and a former clerical worker who is pursuing a career in TV production, got a $500 six-month loan from the Treasury’s credit union in January, at a 16 percent annual percentage rate. The money cleared her payday debt and put her on her feet. Now she has a checking account with the credit union.

“Credit unions were created to offer credit to people with modest means,” said Leslie Parrish, a senior researcher at the Center for Responsible Lending. “So, historically, it’s very much in keeping with their mission.”

It’s like stamping out weeds and watching adorable kittens grow in their place.

Credit Unions Slowly Fill Void As Payday Lenders Leave D.C. [The Washington Post]
PREVIOUSLY: Payday Loans Die In DC
RELATED: How To Find And Join A Credit Union
(Photo: Dr. Hemmert)

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  1. Ragman says:

    Maybe that’ll convince more places to get rid of payday lenders.

    One of the first things I’ve done when moving was to find a credit union I could join. At least the banks have finally pulled their heads out and realized that people DON’T like paying monthly service fees on checking accounts.

    My basic rule of thumb: If a financial institution does not pay me for the opportunity to use my money, they don’t get to.

  2. humphrmi says:

    It’s good to see a success where business (at least, the PDL industry) predicted gloom and doom. I hope this wakes up other states (HEY! ILLINOIS! WAKE UP!).

  3. tenio says:

    wonder if this will happen in ohio. Similar legislation was just passed.

  4. laserjobs says:

    What are the default rates on these loans becasue I doubt they are profitable at 16%. Just wait until the states start backstopping these loans with your tax dollars. What credit unions are doing these loans becasue they need to be put on a watch list for failure.

  5. rpm773 says:

    How does one go about finding a credit union to join? I’m not interested in payday loans, but I am interested in leaving Bank of America, for most of the reasons that often appear on this website.

  6. AdvocatesDevil says:

    Cue the “Credit Unions are terrible, real banks are better for some reason, I guess because they make you bend over and I like that?” poster!

  7. AdvocatesDevil says:

    @laserjobs: I think someone who misspells “because” as often as you do needs to be put on a “watch list for failure.” 200+ banks have gone under in the last 2 years or so. How many credit unions?

  8. Imaginary_Friend says:

    @rpm773:

    Database of credit unions:
    [www.creditunion.coop]

    The Credit Union Locator Tool helps you see if you qualify to join.
    [www.findacreditunion.com]

  9. bohemian says:

    I’m old enough to remember when banks made small consumer loans like this on a routine basis. Regular banks quit doing so about the same time payday lenders and credit cards for anyone showed up. Our credit union still does these kinds of loans but downplays the availability.

    The thing I like about the credit union is that they are accountable to the members and are open about the details of how the place is run. Good luck getting that kind of information out of a bank.

    @rpm773: Ask where you work if they have any association with a credit union. If your a veteran you probably have the ability to join the local credit union that has a branch at the VA facility in your area. Otherwise look up in the phone book for local credit unions or google it. They will have a list of who can join.

  10. laserjobs says:

    @AdvocatesDevil: Thanks for pointing that out asswipe. Now how about a sensible answer to my questions:

    Are these loans profitable at 16%?

    If not who will end up taking the loss?

  11. Trai_Dep says:

    I’m hoping that as soon as Consumerist duplicates its Be-A-Smart-Consumer mindmeld machine in DC, they have the grace and good manners to expand it across the country. Because it works great!
    Either that, or there are a lot of Consumerist commentators that live in the DC area.

    Since, y’know, those Freepers saying that poor people deserve to get screwed since no one else can profitably serve them payday loans were proven so very, VERY wrong, are apologies on their way? Freepers, what do you say? Freepers?!

  12. Dobernala says:

    @laserjobs: Paging the Consumerist Moderator….

  13. Inglix_the_Mad says:

    @laserjobs: Are these loans profitable at 16%?
    If not who will end up taking the loss?

    Well they’re apparently profitable for my Credit Union at less than 14%

    The loss would be through their, effectively, bad loan fund. They have a certain percentage of loans per year that might go bad, and maintain a separate fund for it. However, the credit union itself has never had to use more than half of that fund, ever.

    That being said, if enough bad loans were to happen, the members would bear the inital brunt (until the NCUA/FDIC came) but since it’s a consumer owned business, people would show up pissed and kick out the leadership. FYI, all of the leadership but two are local (as in I or my family grew up with them / their kids our kids / et al) so there’s a great deal of shame involved here too (should they be shown bad stewards).

  14. GearheadGeek says:

    @laserjobs: It is typically not the goal of a credit union to be actually profitable, but often they do target income to improvements/increases in services/capital projects. I’d guess that credit unions are still applying SOME criteria to the loan-making decision, so they’re probably not a viable alternative for the lowest tier of victims of the payday-loan scumbags, but for the people who actually want to pay their debts, I’d guess the credit unions will at least break even. Remember that they aren’t dedicated solely to offering these loans, they have a range of other products and services, so they already have employees and the costs associated with those employees are allocated across the range of products and services and expenses for general operations.

    No one was depositing any money with the payday-loan sharks, only borrowing, so all of their income was from their usury. That probably made it hard to profit at anything approaching fair rates.

  15. leficent says:

    I remember when I switched over to the credit unions- It happened after a large regional bank put a five day hold on my paycheck. The paycheck was issued by ADP, from a local bank, but large regional bank liked to do things like that.

    I joined a credit union and have not ever looked back. Even though my credit union is small and local, I can take advantage of the national network of Credit Union Service Centers and I don’t pay fees at the ATMs of credit unions that are part of the network.

    A few more thoughts on credit union membership:

    I am eligible for membership at 6 credit unions.

    I can join 3 based on the county that I live in and the area that I live in. I can join another based on the university I attended. I can join the 4th based on my professional association, and the fifth based on the fact that I once worked for that credit union.

    This is of course, completely ignoring the rule most credit unions use that you can be a member if you are a spouse or a blood relative of someone who is a member already. So, I can get an account at my Mothers credit union even though I am not a nurse and I can get an account with my Aunts credit union for teachers based on the fact that she and my Father are members.

    If I ever get around to marrying my SO, who has an account at yet another credit union, I will be able to be a member at that credit union even though I am not personally a state employee.

    That comes out to a total of 9 choices- even if I plan on sticking with “my” credit union.

  16. Consumerist-Moderator-Roz says:

    @laserjobs: Do not flame other users. If you want to comment here, do so civilly and without childish name-calling.

  17. urbanbackpacker says:

    I have taken out a few of these when I was younger. Instead of getting a credit card just a few small loans when I was 18 helped build my good credit history. I use my credit union to buy cars, and my wife and I will be using our credit union to help buy our first house in a few years.

  18. unpolloloco says:

    So, instead of charging $20 for a one-week $300 loan, credit unions are charging a minimum of $48 for a one-year $300 loan. How is that beneficial???

  19. illtron says:

    @unpolloloco: You haven’t been paying attention, have you? It’s beneficial because the borrowers don’t have to take the full term to pay off the loan. I know with loans through my credit union there are no penalties for early payment.

    Really though, it’s because people fall into a vicious cycle of borrowing more and more from the payday lender. Nobody ever pays them off in the initial term.

  20. ncboxer says:

    @unpolloloco: I wonder if you can pay it off early with no penalty- like most home mortagages and car loans? That way if you do pay it off in a week, it has only cost a little of $300.

  21. unpolloloco says:

    @ncboxer: Not knowing anything about credit union loans, I’d bet there would be loan origination fees tacked on, making it close to the same cost as a payday loan if the loan period was only for a week or two.

  22. TouchMyMonkey says:

    Imagine that. All those people who came on here defending the payday lenders were completely full of it. Where are they now?

  23. vitonfluorcarbon says:

    Credit Unions are my place of choice. When I had to finance cars, they gave me a rate about 1/2% lower than my bank would. Additionally, I earn a 2.9% interest rate regardless of it being savings or checking – my bank pays shoot for interest on savings and NOTHING on checking. My CU doesn’t charge me for 5 out of network ATM transactions a month and there aren’t all the stupid conditions in place like the bank has to do the same (Bank: 10 Debit card transactions, 5 online bill pays, 2 deposits, etc… you get the idea.)

    It sounds like the CU is actually rescuing people instead of putting then in an inescapable trap set up by the payday loan scmucks.

  24. TechnoDestructo says:

    Maybe the loans have a lower risk of default if you don’t charge 300 percent? I mean that would kind of reduce the impossibility of it.

  25. thelushie says:

    @AdvocatesDevil: Actually the credit union that my mother is with is behind on the technology (because they are not comfortable with it), debit card that is not even through them (as in it takes a day to post to the debit after posting to the account), asks for her social security number (as in say it out loud) and then gets pissy when I insist she write it down, and on top of all that, has her money in a bank account in Sleepy Eye, MN. Looking at other credit unions in my area, none are any better. And, no, the service isn’t any better.

    I don’t like banks anymore than credit unions but I would rather have a bank that you don’t have to wait for the guy who posts the money to accounts to come in and post your paycheck and has nationwide ATMS.

    I am sure there are some that are different in other places, but around here they are terrible. Don’t assume that ALL credit unions are the best things since sliced bread.

  26. madanthony says:

    part of the reason that the credit union loans are cheaper than the payday loans are because they are for a longer term. In theory, payday loans were meant to be for a two week period. The reason the interest rates appear so high is because they are taking an interest rate for a 2-week loan and making it into an annual APR when they quote 300%.

    Comparing the interest rate on a 2 week payday loan to a 1-year personal loan is comparing apples to oranges. And it will be interesting to see if credit unions start having high default rates on these loans.

  27. Ectophensis says:

    My credit union (Watermark, Seattle) recently rolled out a program that was designed to help people wean themselves off of the rotating cycle of payday loans. This is how the Watermark website describes the program:

    “Rate: 18.00% APR¹
    No fees
    No prepayment penalties
    ¹Subject to credit approval. Loan available only to Prime account holders. Loans available in $50.00 increments. Loan requires direct deposit, and may not exceed the amount of your direct deposit. Loan balance plus accrued interest must be repaid via automatic funds transfer from a Watermark deposit account on your next pay date. For each advance, 5% will be placed in a required, restricted Payday Freedom Savings account, which does not allow withdrawals for 20 months from the date of your first loan. A minimum balance of $25.00 is required to earn dividends on this savings account.”

    I know that this is a program that they’re watching intently, so if they saw a rash of defaults, they would likely tweak the program further. But the requirements on direct deposit and the enforced savings I think are good controls on the program.

    @thelushie — Credit Unions are indeed not all created equal. I like Watermark a lot, but the last credit union I belonged to sucked. The great thing about Washington is that rules for joining a credit union were relaxed here a few years ago; now just about every credit union’s requirement for membership here is that you live or work in Washington state. From poking around a few Minnesota credit union sites, that appears to not yet be the case there. Should that come to pass, you fully could join a more technologically-savvy credit union in, say, the Twin Cities and likely do all of your in-person account activity through a local credit union branch of another credit union closer to home (the burgeoning metropolis of Sleepy Eye, MN). That is, of course, if both credit unions handle shared branching (see [www.cuswirl.com]). And a no-fee ATM is as close as the nearest 7-Eleven.

    I think the bottom line is that overall, credit unions are better than banks. Some banks are really good. Some credit unions are really bad. It does pay to shop around.

  28. gmoney says:

    @madanthony: it’s not apples to oranges. As a few others have said – you can pay it off in two weeks if you want. Neither of my CUs has any origination fees or early payment penalties. That’s not part of their business model, which is to serve their client base. Having the option to pay it off over a longer period is a good thing , though you wouldn’t recommend it. It sure beats having your deferred payday loan check bounce and give rise to NSF fees and bad check criminal charges.

  29. gmoney says:

    One of my CUs actually has its own payday loan program without the predation:

    * Maximum ceiling of $500
    * 12.00% APR
    * No fees
    * Balance plus accrued interest must be repaid via Funds Transfer from a deposit account on the next pay date.
    * Members must already have their paycheck on direct deposit.
    * A Salary Advance Cash Account will be established for every Salary Advance Loan or advance to provide a means to save money easily and end the payday-to-payday cycle.

  30. dragonvpm says:

    @madanthony: Comparing a CU loan to a payday loan is not comparing apples to oranges. APR is the standard yardstick used in the lending industry. Whether the loan is for 2 weeks, 6 months, 5 years, or 30 years it’s still quoted in terms of APR (or it should be unless someone has something to hide).

    Here’s a simple test. How much would it cost you to borrow that money for 2 weeks from a CU? How much would it cost to borrow it from the Payday loan place? Presumably you can borrow comparable amount of money and you can figure out what the costs are for 2 weeks, 4 weeks, etcc… We went over this when the previous round of payday articles went up. Some people don’t want to believe that the fees associated with a 2 week loan actually mean an effective APR of 300% (or whatever it may be) but they do.

    Assuming they’re doing some basic amount of credit checking, I don’t see why they’re going to see a higher rate of defaults. I mean, if you think about it, the cheaper the loan, the less likely someone is to be unable to pay it (i.e. I can much more easily pay principle + 16% interest than I can pay back principle + 300%). The interesting question now is how many people who used to rely on payday loans no longer qualify for anything from a CU, bank etc…

  31. Imaginary_Friend says:

    @thelushie: In California, it’s illegal for your mom’s credit union to use her social security number as an identifier. If her credit union is located in California or does business with any account holders in California (including via mail or internet), they could be in a whole heap of trouble.

    Google Senate Bill 168 re: personal information and confidentiality. I think it went into effect around 2002.

  32. dirtleg says:

    We have been members of our credit union for about 20 years now. Prior to that my wife and I had been banking at a local bank since we were in grade school. The bank was the victim of a series of buyouts to progressively larger and more national banks. We got out with the second buyout. The tellers and desk employees no longer knew our names or our families like they had for years. At the credit union we have been dealing with the same folks for loans, CD’s, automobile purchases and accounts for years. They know us and we know them by name and face. I challenge you to find that kind of customer service and any bank these days.

    I’m just sayin’.

  33. thelushie says:

    @Imaginary_Friend: The employees of this credit union probably think that everyone from California are a bunch of crazy hippies. It is in WV, unfortunately. One branch, no ATMs, barely any service. I am not sure they know what the internet is. They have a website, sort of. But it hasn’t been updated in years.

  34. Imaginary_Friend says:

    @thelushie: We are a bunch of crazy hippies, but that’s beside the point. ;)

    That sounds like the world’s lamest credit union. I feel bad for your mom.

  35. thelushie says:

    @Imaginary_Friend: I love hippies!!! It is pretty lame. I think I have her convinced to leave though. In fact, every time I go in there, there is someone closing their accounts. They do it very cheerfully.

  36. lihtox says:

    @Ectophensis: Can anyone offer any tips about “shopping around” for a credit union? What should one look out for?

  37. laserjobs says:

    Who’s Missing from the Payday Loan Debate?

    [www.newamerica.net]

  38. doctor_cos wants you to remain calm says:

    @laserjobs: Thanks, that was a good read.

  39. TouchMyMonkey says:

    @thelushie: Nationwide ATMS don’t matter much if the bank is dysfunctional. FWIW, our credit union has ATMs all over town, and they appear to have a deal with the big convenience store chain in our area (including the one within walking distance from my house), so I never have a problem finding an ATM machine.

  40. harvey_birdman_attorney_at_law says:

    @Dobernala:
    It’s a legitimate question.

  41. thelushie says:

    @HurtsSoGood: All banks are dysfunctional and that includes credit unions. It is choosing the lesser of two evils, IMO. I need something that is not just all over town but all the nation as I travel. I have not had a problem with Chase but we have had a myriad of problems with the credit union. I looked into others and they are all alike. And if they are going to put my money into a traditional bank account, I think I will cut out the middle man and do it myself.

    If others like credit unions that is great. But in my area with what I do and how I travel, the only local option is not an option.

  42. lockdog says:

    For those of you stuck with backwater, techno-phobic local credit unions, I’d like to recommend Digital Federal Credit Union (once the employee CU of Digital Equipment Co) It’s http://www.dcu.org.
    I’ve been banking online with them since the mid 90s. They are continuously upgrading their technology and security. I pay no atm fees, and if an atm charges me a convenience fee, they refund it. I can scan and deposit checks from home (yes, from home). There banking website is the easiest to use I’ve ever seen, even compared to some of the big national banks, where you might expect better. The loan rates are excellent and the customer service has always been fantastic. I know I may sound like a shill, but I’m just that satisfied of a customer. Rules for membership are pretty generous, you might check it out.

  43. mac-phisto says:

    @dragonvpm: what you are ignoring is that CUs do much more than payday lenders, therefore, they can afford to “lose money” on originating some loans b/c they offer other products. they typically don’t charge fees on loan origination, so a $500 loan at 18%APR for a year means $50.28 in interest (over the course of the entire loan). if you paid it off in 2 weeks, it would cost you $2.10. does that cover the costs created by booking the loan? no, not even close.

    for the CU, a payday loan is an investment in the future – giving someone the stability they need in the short-term means they will come back with more business later that creates the profit necessary to help others in the short-term. that’s how a cooperative works.

    you’d be surprised how many products at CUs are provided “at a loss”, or rather, subsidized by other members. some people think that’s unfair, but the only difference is how profits are distributed. in a bank, your money goes to help investors that own stock. in a credit union, your money goes to help other members. by helping each other, we all become stronger – that’s the idea anyway.

  44. thelushie says:

    @lockdog: Thank you, I will look into it.

  45. Ghede says:

    “It’s like stamping out weeds and watching adorable kittens grow in their place.”

    Most. Awesome. Simile. Ever.

  46. ucanthandle says:

    Someone needs to teach the readers on this site how to think critically. This article was pushed, I’m sure, by the Center for Responsible Lending, (the chief antagonist to the payday lending industry-and, a backer of guess what-a credit union). The article itself says that this “replacement” to payday lending is so small that it is virtually irrelevant, (8K loans NATIONWIDE!).
    In reality, if you have horrible credit, and need emergency cash (ie, to save your job with a timely car repair), you are pretty much out of luck now. Yes you can become a member of a credit union and perhaps eventually get a loan-but not without underwriting approval-and then it may be too late-and there goes your income! Luckily, those who’ve never been in this type of situation are SO much smarter than you, and will tell you what your options are for you.
    And if you get an account with a credit union and bounce a check.. what’s the “APR” on that? It can be thousands of percent. “OOPS! Didn’t thinks about that, I was only trying to help the stupid people!”

  47. PaydayConsumer says:

    This is a good sign. In Ohio, the payday lending industry has repeatedly issues the talking points that 6,000 employees will be out of work and thousands of consumers will be without a way to access cash in a financial crisis if House Bill 545 becomes law. This shows that it is indeed possible to provide credit to low-income borrowers without charging exorbitant interest rates. Let’s hope that House Bill 545 becomes law and that payday lenders, credit unions and other small loan issuers offer loans at reasonable rates (28% APR or below).

  48. mac-phisto says:

    @ucanthandle: there is a big push in the industry to tie underwriting for payday loans to non-traditional methods – in other words, providing proof of income & agreeing to set up direct deposit will get you out the door with money.

    the biggest problem is getting people the money they need now while complying with “safe lending” requirements set forth by state & federal regulators. CUs & banks alike need to prove some sort of due diligence in loan documentation or they risk actions from the agencies that audit their compliance.

    & to be honest, numbers for the program aren’t likely to be too promising for some time. CUs generally don’t have the operating budget to run primetime ads like CASHCALL.

  49. ucanthandle says:

    You are correct payday consumer-this article DOES show that it’s possible to provide an alternative to payday lending for those in need. It is also possible that you will go out with Jennifer Beal.
    What we’ve lost in this country is all sense of pragmatism. What have we REALLY addressed if, as MacPhisto points out, the prognosis for wide availability of these products are slim? Once we ask that question, we need to follow up-if there REALLY isn’t a real world solution to the problems that were previously addressed by payday loans, why was this article written? Who was behind it besides a lazy journalist who was fed some enticing factoids?
    And, if there really isn’t an alternative available-what have we gained by robbing a choice from our citizens? Now some citizens that previously could get a payday loan to handle an emergency-or save lots of money on (yes) much more costly bounced check and other fees have no choice. All with the best of intentions, and usually from people who have never needed the services that this type of business provides. Come on people-THINK CRITICALLY!

  50. overeducated says:

    Michigan enacted a law allowing credit unions to give small loans to non-members as a way to decrease payday lending. I don’t know if had any positive effects.

  51. hwyengr says:

    @ucanthandle:

    THINK CRITICALLY!

    I don’t think that phrase means what you think it does.

  52. MrEvil says:

    My Credit Union will makes loans to people with terrible credit in order to help them rebuild it. They loan you the money and put it in your savings account, but there’s a hold on it (meaning you can’t withdraw). Payments are direct draft on a weekly, semi weekly, or monthly basis.

    The good part is since that balance is part of your savings you do earn interest on it (To offset the loan interest) and my CU also has dividends to members based on your account balances. The terms are flexible, the rate is low (since the loan is secured), and the loans are for small amounts.

    Also, alot of CU’s will ignore the reports from the Big 3 bureaus if you have a good payment history with them.

  53. @laserjobs: A mark up is a markup, whether it’s 16% or 300%. Any percentage charged on the loan is a profit. Period.

  54. catastrophegirl chooses not to fly says:

    i LOVE credit unions. i have belonged to a total of three in my life, still have accounts at two [one was in my previous state of residence only]
    last week my car’s engine blew up. i kept trying to keep it running because it was paid for but when the repair estimate is twice the car’s RUNNING value…. it’s time to let it go.
    i had the mechanic drop me at the nearest branch of my credit union to apply for a vehicle loan before going car shopping

    the loan officer not only helped me figure out what price range to ask for by pulling up the kelly blue book values for me, she advised me that my credit report showed several recent credit checks [which i knew about, i had a credit card limit raised recently] and advised me [since i have never financed a car purchase before and know nothing about the workings] that i should NOT allow the car dealership to run a credit check since it wasn’t needed [what with the preapproval and all] and it might affect my credit history negatively
    i can’t imagine a commercial bank taking that kind of trouble for a customer

    as a point of interest, when the car salesman tried to run a credit check and i refused, he told me it was ‘to make sure i wasn’t a terrorist because they get fined if they sell a car to a terrorist’

    um… no. credit checks do NOT get you super secret access to the terrorist watch list.
    i refused, he told me to take it up with the finance guy. the finance guy didn’t even ask. he said ‘oh, you’re preapproved with the credit union? sign the intent to purchase, take the keys. when they finalize the loan have them call us to say the check is on the way. drive safe!’

    i especially love that my credit union can communicate with a customer over the phone or via secure internal email 24 hours a day and when my debit card got posted twice for a transaction a couple of weeks ago, they fixed it with two emails back and forth and it only took about 3 days to get the money back.

  55. Tyr_Anasazi says:

    @ucanthandle: And your point would be…? You’re doing a lot of shouting but it’s coming across as sound and fury signifyinh nothing…

  56. PaydayConsumer says:

    The payday lenders are lying to Ohio voters in attempt to overturn one of the nation’s best consumer protection laws in November.

    Watch here:

    .

    The payday lobby is spending millions on TV to deceive voters and convince Ohioans that 391% amounts to financial freedom! 391% is not freedom, it’s a trap! Payday lenders need to acknowledge that their business is predicated on their ability to trap people in debt!

    Payday lending is a scourge on our families, our communities and our economy! VOTE YES ON OHIO ISSUE 5!

    [www.yesonissue5.org]