Better Choice to Payday Loans

Quad - State Business Journal, Jun 2007 by Heerwagen, Peter

Payday loans are a big issue in many states, as earlier this year Virginia politicians grappled with stricter regulations on payday lenders who charge high interest rates that keep many low-income borrowers on a payday treadmill.

The Community Financial Services Association of America, the payday loan industry's trade group estimates that its members have 22,000 outlets in the United States with $40 billion in loan volume outstanding.

Credit unions in several states are coming up with alternatives to payday loans. Last October, the Pennsylvania Credit Union unveiled the Credit Union Better Choice program, and 48 credit unions have signed on.

Frick Federal Credit Union in Waynesboro, with $11 million in assets and 1,700 members, is the only Franklin County credit union in the program, but has not implemented it. "We do not have our policy written into the fold and ready to use, said Pat Shew, administrator. "We had one of our loan officers take a class in it [Better Choice], but we need a policy approved by our board."

When asked why Frick is participating, Shew said, "I felt it was a shame people were paying 20% and 30% interest when we can do it at 10%. We know we can help people who get into a tight squeeze."

Patriot Federal Credit Union, the largest in Franklin County with $350 million in assets and more than 40,000 members, is not in the Better Choice program. "We're looking at another alternative payday loan program, but we won't be rolling it out this year," said Mary Warren, marketing director for Patriot.

The Better Choice loan is a short-term installment loan of up to $500 with a maximum term of 90 days. The program is offered to credit union members without using past credit history as a basis for a loan decision. Employment verification and other loan decision criteria are determined by the credit union.

A maximum of 18% APR interest and maximum $25 application fee may be charged. The application fee may be paid either in advance or financed as part of the loan.

There is a forced savings component to the Better Choice program transaction. At loan disbursement, 10% of the loan amount is deposited into a savings account in the member's name. The member cannot withdraw any portion of that deposit or close the account until the loan is paid in full. The interest that the member pays on the amount deposited into a savings account will be rebated to the account upon payoff.

For example, at the end of a 90-day term, $2.25 would be added to the member's savings account, assuming a $500 loan at an 18% annual interest rate.

A borrower may not have more than one Better Choice outstanding loan at a time and loans cannot be rolled over. In the event the loan is written off, the credit union may apply any balance in the member's savings account to offset the loan loss.