Credit Unions Are Stepping in to Fill Short-Term Loan Needs
Inside Subprime: Aug 14, 2018
By Lindsay Frankel
Financially-strapped borrowers who lack access to traditional credit frequently become victims of predatory lenders. But increasingly, community development financial institutions are striving to provide affordable alternatives to payday loans.
Payday loans represent a $40 billion market, and these profits come from low-income borrowers who often have poor credit and therefore lack alternative options. Payday lenders are also known to prey on marginalized communities. The high interest rates and fees charged on payday loans often trap families in debt. More than 80 percent of payday loans are taken out within a month of a prior loan, according to the Center for Responsible Lending. This occurs because borrowers are unable to pay back their loans on time while covering basic expenses.
Thankfully, credit unions are stepping in to offer alternatives to these risky products and fill the need for small-dollar loans. These nonprofit entities are well-prepared to meet the short-term loan needs of their members. Back in April, WeDevelopment Credit Union announced its opening in Kansas City, marketing itself as an alternative to payday lenders and receiving encouraging responses from members of the community.
More recently, Freedom First Credit Union has begun offering alternatives to payday loans in Virginia. The credit union announced a partnership with QCash Financial designed to offer more affordable small-dollar loans to its members. QCash can underwrite, approve, and fund loans in under one minute using a borrower’s financial history through its automated platform. The interest rates and fees also come at a much lower cost to borrowers than payday loans, which typically carry triple digit annual interest rates.
“Freedom First understands how important access to cash is for breaking the cycle of debt and attaining financial stability,” said Ben Morales, CEO of QCash Financial. “Small-dollar loans offer better rates and terms. Delivering cash quickly to members can be a powerful step in moving members toward improved financial health. Freedom First looks out for those communities that need their services the most, and we’re proud to be a partner with them.”
Dave Prosser, Senior Vice President of Community Development at Freedom First, says the partnership is directly in line with the credit union’s mission. “We take pride in meeting our members’ needs right where they are on their financial journey, whether they are just starting out or they need money management options during more challenging times. QCash Financial’s automated solution is simple, fast, and bases underwriting decisions on the member’s relationship with us, not a credit score,” he said.
The National Credit Union Administration has also proposed a new payday alternative loan product in order to provide more options for credit union members. While this proposal has been met with some criticism, it shows efforts towards providing lower-cost options for low-income families that need quick access to cash. The increased attention on the dangers of payday lending and the increased efforts of businesses to provide alternatives are hopeful trends that may help low-income families build credit and develop financial self-sufficiency.