Short-term lending and small-dollar loan programs have gotten a bad reputation in the last several years. One of the primary contributing factors to that are unscrupulous, predatory lenders with high interest rates. Entering the marketplace presents a tricky PR obstacle for credit unions.
However, that’s not in itself a good reason to stay out of the market. In this blog, we’ll cover why credit union small-dollar loan programs are necessary and how credit unions can break the stereotype.
Why Small-Dollar Loan Programs Are Necessary
Regardless of how well the economy is doing—or how well people say it’s doing—more Americans than ever are living check-to-check. In fact, two in five American workers wouldn’t be able to come up with an emergency $400.
It’s easy to think these economically-unstable people are poverty-level earners. That may be true, but it’s only part of the picture. Factoring in things like
- Rent or mortgage
- Student loan debt
- Credit card debt
- Automobile loans
- General living expenses
It’s clear that middle- and some upper-middle income earners are similarly affected by check-to-check living.
What Do These Loans Pay For?
Mostly, short-term credit is used for living expenses. When there’s more month than paycheck left, small-dollar loan programs can help bridge the gap between bill day and payday.
Often though, many small-dollar loans must cover living expenses only because a member has had a crisis of some sort:
- Medical emergency
- Car trouble
- Surprise bill
- Interruption or loss of income
Things come up. Unfortunately, things cost money.
If most American workers are living check-to-check, the necessity of small-dollar loan programs is obvious.
But the Reputation…
For many years, short-term credit was the sole domain of predatory lenders. However, with an obvious need in the market and new regulatory perspectives on the industry, more reputable lenders are entering the field.
These traditional financial institutions do risk potential PR fallout from entering an arena with a bad reputation.
There are two ways to combat that reputation.
1. Don’t charge high interest rates
In some states, payday loan vendors charge almost 700% APR.
Keep your loan rates lower. APRs between 18 and 36 percent work well.
If you keep your rates low, you’re less likely to endure the ire of borrowers.
2. Remember the purpose of the loans
Credit union small-dollar loan programs serve members without significant emergency funds or other resources.
If your credit union approaches your small-dollar loan program as a member resource, not as a money-maker, you’re on the right track.
Heading Down the Right Path
If you approach the financial problems of most Americans holistically, then you can absolutely help your members.
If you can deliver short-term credit as a resource to help struggling members, then you’re heading down the right path. In fact, we’ve already written a little about how member-first practices will help you overcome potential brand implications.
However, if you’d like to learn more about credit union small-dollar loan programs and what they can do for your members, follow the links below. Or, if you’d like to see how short-term credit can help your members during emergencies, download our Member Crisis Guide.