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Credit unions can offer sustainable, affordable short
term credit at a fraction of the cost of traditional payday lenders, says a
recent report by Marva Williams, until recently Woodstock Institute senior vice
president.
“In addition to enacting consumer protections for the
payday loan industry, increasing the number of lenders competing to provide
affordable short-term loans is critical to driving down the cost of credit,”
said Williams.
As part of this strategy, Woodstock Institute conducted
an 18-month evaluation of the short-term loan products offered by six credit
unions participating in a joint program offered by the National Federation of
Community Development Credit Unions and JP Morgan Chase.
Unlike traditional payday lenders, which charge
triple-digit interest rates for short-term loans and structure them in a way
that makes it difficult for borrowers to meet anything more than the minimum
interest payment, these credit union-based loans are lower in cost and offer a
number of asset building components.
Many of the loan products required the borrower to deposit
a portion of the periodic loan payment into a savings account to help build a
cushion against future financial instability. The credit unions also
worked to develop long-term relationships with borrowers, having learned that
longer-term members had considerably better repayment records than new members.
Several credit unions also used the credit reports of new
borrowers to educate their members and help them identify any errors on the
report. These and other steps created a product that was also sustainable
in the long term for the participating credit union.
“Adopting consumer protections to prevent over-borrowing
and encouraging or requiring financial education contribute strongly to the
success of the product,” said Williams.
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