Credit unions offer payday loans

Many sing the praises of credit unions -- nonprofit alternatives to banks that generally offer lower loan rates and fees to customers. So how surprising is it that credit unions are offering products similar to the much-disparaged payday loans?

These aren't the type of credit union loans that personal-finance writers advise you to get to help build or rebuild your credit scores, especially if you can't get a credit card. And the payday loan folks have taken note.

Writes the PaydayLoanIndustryBl​og, commenting on a new iWatch News report by Ben Hallman (part of which also appeared in The Washington Post):

Under the guise of helping their credit union members, credit unions have been tip toeing around payday loan type products for years. WE DON'T HAVE A PROBLEM WITH THIS. Our only complaint is the hypocrisy surrounding their products.

But are these credit union payday loans really that bad? It depends -- and it really pays to be an informed consumer before you apply for one. 

For instance, the National Credit Union Administration, which oversees federally chartered credit unions, has devised a new type of loan "as a viable alternative to predatory payday loans" -- without some of the predatory practices of payday lenders.

These short-term, small amount loans, or "STS loans," have a higher interest rate (28%) than your typical credit union loan, with limits on the term (one to six months), amount ($200 to $1,000) and fees. The cost for applying is $20, presented as a reasonable charge to cover the processing costs. Credit union members -- the only people eligible for them -- can't get more than three of these loans in six months.

That's still a lot to pay for a loan. However, unlike payday loans, these loans cannot be rolled over. MSN Money columnist Liz Weston has said:

Payday lenders make 90% of their revenue from borrowers who roll over their loans at least once, according to the Center for Responsible Lending, and the typical payday borrower eventually pays back $793 for an initial $325 loan.

Plus, the NCUA noted (.pdf file), the loan history, unlike payday loans, will be reported to the three major credit bureaus, allowing those who use the loans responsibly to increase their credit scores. Post continues after video.

It sounds reasonable: Lenders should be able to recoup their costs for processing loan applications and also charge higher interest rates for higher-risk loans. However, some credit unions offer other types of payday loans, and those are drawing more heat.

Some of these loans are funded by payday lending firms or state-chartered credit unions exempt from federal regulations -- with fees high enough to push the effective annual interest rate over 100%. That's less than a typical payday loan, but still very expensive money.

Hallman wrote:

All told, more than 500 credit unions are making payday loans with widely varying interest rates -- from a modest 12 percent with no fees at State Employees' Credit Union in North Carolina to the high triple-digits loans sold by Mountain America (Federal Credit Union). It has become a fast-growing trend in an industry struggling to remake itself after the financial crisis.

He added, "An iWatch News investigation found 15 credit unions that, like Mountain America, offer high-cost loans that closely resemble traditional payday loans."

Why would credit unions get involved in such products? Some are obviously genuinely concerned about protecting their members from predatory lenders and trying to provide an alternative quick-cash source while minimizing losses. Others have a dire need to make more money, after suffering through the poor economy. (If you want to see how your credit union is faring, you can get a government report here.)

"They are promoting these loans as payday alternatives, but they are not really alternatives; they are egregious payday products," Salt Lake City community activist Linda Hilton told Hallman regarding some of the products. "We look at it as a moral lapse of credit unions."

More on MSN Money:

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• Estimate your credit score for free
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