After years of poor regulation and high interest rates, most short-term lenders have developed a negative reputation. Nevertheless, reputable financial institutions are starting to re-enter the arena. How can credit unions successfully overcome the sentiment against small-dollar loan programs?
In this article, we’ll discuss the one best piece of advice for combating the negative perception of small-dollar loan programs. There may be other solutions, but this one is the most critical.
Keep Your Members’ Best Interests at Heart
If you keep your members’ best interests at heart, then you will do right by them. Any potential brand implications will quickly dissipate. The only reputation you’ll have if you keep your members’ interests at heart is that you value honesty, integrity, and service.
However, if you’d like to know a little more about what steps you can take to serve your members, we’ll go on.
How We Got into This Mess
For a long time, the only providers of small-dollar loans were payday lenders who charged exorbitant interest rates. They recognized that people who are short on money are also short on options. They charged what they could get away with at the expense of their borrowers’ long-term financial health.
While the payday loan industry enjoyed too little regulation with too much greed for too long, some regulators have started fixing things. Still, there are still some states where interest rates for small-dollar loans sit just under 700%.
Desperate borrowers would go further into debt from the interest on their loans. They became trapped in spirals of debt.
Many people still have a negative perception about the service because of unscrupulous, predatory lenders.
How We’re Getting out of This Mess
The problem with avoiding the small-dollar loan industry is that there’s a need for it. Most Americans live check-to-check, and almost half don’t have $400 in case of an emergency. All it takes is one blown head gasket, and someone must choose between driving to work and paying rent.
People can’t afford surprise bills or small interruptions in income. Who’s going to meet their need?
Credit unions are well-positioned to offer short-term, small-dollar loans with good rates to their members. It’s a necessary service that puts member needs to the fore. Plus, with more trustworthy lenders entering the arena, public perception may slowly shift positive.
How Are Credit Unions Well-Positioned for Small-Dollar Loan Programs?
- They already have loan programs set up that they run faithfully and with integrity. Adding another loan service into the mix can be very easy.
- There are few competitors. Credit union members have essentially two options for small-dollar loans: the predatory payday loan center down the street, or their not-for-profit credit union.
One of those options is hands-down the better one, and anyone can see that.
Once More, for Good Measure
Small-dollar lending is first and foremost a member service. Remember everything the industry did wrong before, and then do the opposite. So long as you stick to that philosophy, your public perception will reflect it.
Your members’ long-term financial health should be top-of-mind. Credit union small-dollar loan programs are about meeting members’ needs when they need it most. When they’re unable to make ends meet—when there’s more month than paycheck left—then you rise to meet that need.
We’ve compiled several resources for credit unions considering implementing small-dollar loan programs. Follow the links below to learn more.
Or, if you’d like to see how short-term credit can help your members, download our Member Crisis Guide.