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I read with some interest an article in my credit union's quarterly newsletter about a new loan product that they heralded as a great alternative to payday loans. The article claimed that members of the credit union could avoid the triple-digit APR of payday loans and enjoy the convenience of having the loan issued and paid back to a credit union they trust. The article rehashed the common issues associated with payday loans and touted its own alternative as the better solution. At first glance the product does seem to be a better alternative to cash advance loans. However, when one takes a closer look at the credit union's product it becomes apparent that it is nothing more than a traditional payday loan, disguising its fees in terms other than an APR, and with more strings attached than what a consumer would experience with a traditional cash advance lender.

Credit unions have been under pressure for some time to offer a consumer friendly alternative to payday loans. Credit unions have been heralded as the champion of the individual and seen by many people as a better choice over banks when it comes to managing personal finances. However, credit unions have been slow to develop a payday loan alternative for two reasons:

1) It decreases the profits they generate from their more lucrative products such as late fees and overdraft protection services.

2) Credit unions cannot offer the product for substantially less than payday lenders.

As a recent Forbes article revealed, most credit unions receive the majority of their income in hopes that their members forget to balance their check books. The article stated that credit unions rely on bounced check fees, overdraft protection product, and late payment fees for the majority of their income. By offering a payday loan alternative to its members, credit unions stand to lose a large portion of their income. Instead of offering payday advance loans, many credit unions have chosen to publicly participate in the fight against cash advance lenders. Some speculate that credit unions have become so vocal against these loans because they stand to lose so much.

The second reason credit unions have avoided offering a payday alternative is because they cannot offer it for substantially less than what cash advance lenders are issuing their loans for now. For example, the credit union that sent me the newsletter offers its $100 "payday alternative" at 18% APR (sounds good, right?) but then they also charge a "participation fee" of $30.00. When you calculate the APR on that 30 day loan (with the participation fee) you can expect to pay 383% APR, which is about the same a payday lender. The credit union may explain away this charge by saying the risk associated with the loan justifies the higher rate. However, the credit union has unfettered access to the borrower's bank account and pay check through the credit union's direct deposit requirements. Reputable cash advance providers do not force their borrowers into wage assignment like credit unions do with their product.

Some credit unions have attempted to offer payday loans at a lower rate but with limited success. Credit unions in Pennsylvania were given government assistance (i.e. taxpayer support) to help float a low APR payday alternative. In the end, many of the Pennsylvania credit unions were not repaid by borrowers and they were forced to terminate the services, leaving taxpayers to foot the bill.

Borrowers are right in seeking out the low cost cash advance lenders. In the past, credit unions have been good choices for consumer-minded loan products. However, in light of the problems with credit union payday alternatives such as hidden fees and the high probability of program failure, consumers should seek out lenders who truthfully disclose the fees associated with the loan and who have a proven track record of successfully issuing cash advance loans while providing consumers the safeguards they deserve. As always, consumers seeking short-term loans should use them responsibly and use lenders who adhere to CFSA's best practices.

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