Most credit union small-dollar loan programs assist people who are too cash-strapped to make large purchases. Can quick loans convert short-term borrowers into traditional ones?
There are several ways that credit union-given small-dollar loans can help members with larger loans in the future. This article will explore a few of the major pathways to longer-term borrowing.
Who Needs Small-Dollar Loans?
Credit unions who offer short-term, small-dollar loans overwhelmingly support their lower-income members’ needs. They also serve the large number of middle-income earners who have a hard time saving money because of credit card debt, student loan payments, and so on. Lastly, they serve members who experience a loss or interruption of income.
Members with less resources are not typically the same members who might look soon toward larger, traditional loans. However, beyond helping members through difficult financial situations, that’s precisely what they can do.
Nobody Has Money, Everybody Has Needs
Nearly 60% of Americans currently live check-to-check. Around 40% of Americans don’t have a spare $400 for emergencies.
While minimal resources are perfectly fine most of the time, emergencies can change things quickly. Unexpected things come up, and suddenly, that $400 would have been critical. For example,
- Car trouble
- Medical bills
- A traffic ticket
- Missing work from the flu
- Transitioning into a new job
- Complications from a natural disaster
- Partial government shutdown
All the above represent significant financial blows and losses of income. Considering how many Americans feel financially unhealthy, it’s certain that every credit union has members who fit this stark financial profile.
When a crisis occurs, these members are at the highest risk of losing long-term financial viability.
Small-Dollar Loans for Now…
When members encounter emergency situations that call for a little bit of cash, small-dollar loans can help them. The relatively small sums of quick loan money can help them stay solvent in the present while planning for the future.
These are a few of the ways that small-dollar loans can convert short-term borrowers into long-term ones.
Protect long-term financial viability
Credit union small-dollar loan programs can keep these at-risk members from going to predatory lenders. Most importantly, credit union quick loans have much, much lower interest rates than their competitors.
Members won’t be saddled with large loan debts and fees, which keeps them from entering a debt spiral. In turn, that will help them gain better financial footing—they’ll be ready for a new car loan in no time.
Credit unions benefit from the trust that their members place in them daily. Offering short-term lending solutions to people who need a bridge between paychecks lets members know that the credit union has their best interests and financial wellbeing at heart.
In the future, those members will be more likely to trust their credit union with more lending services.
Facilitate debt management
Experience managing small loan debt helps members practice healthy financial habits for the future. Once they have practice taking out smaller amounts, they’ll feel more comfortable with larger ones.
Credit union loan officers may speak with members who have successfully managed a few small loans. They could steer those creditworthy members toward larger personal loans with better interest rates.
Short-Term Lending Should Serve Members First
People who need short-term loans are usually regular people going through a difficult period. They should be met with compassion, understanding, and support.
Offering small-dollar loans can help some members get back on their feet. In turn, that may help convert them into traditional borrowers in the future. However, even if it doesn’t, quick loans are a valuable—even critical—service.
To learn more about how you can help your members with a small-dollar lending program, follow the links below or download our Member Crisis Guide.