Temporary Loans Validated by Credit Union Report

A recent report by the National Association of Community Credit Unions outlines a need for temporary, small denomination financial loans. While a few credit unions offer such loans, which normally range from $100-500, most leave such lending to stores that offer payday loans or cash advance loans, as they are sometimes called. These loans, which are offered for periods of fourteen days, carry fees that range from $10-30 per $100 borrowed, which can translate to interest rates that can approach 1000% for every year.

The payday loan industry defends these products, saying that their customers understand of the charges and that their products can actually save their customers cash when they are in need. The report by the NACCU seems to agree, as it pointed out that a typical payday loan of $100 with a $15 charge carries an rate of interest of 391% annually. Then again, if the same customer bounced a check for $100, their bank or credit union might charge them a fee ranging from $35-50, a much higher rate when calculated on a yearly basis. The report also made similar comparisons to bank card late charges or a late utility bill that required a penalty fee and a reconnect fee.

While it is true that, taken on an annual basis, these fees are higher than those charged for quick cash loans, the comparisons are really between apples and oranges. The fee charged for a quick cash loan is rightly calculated as interest, which is defined as a fee charged in exchange for the lending of cash for a specific amount of time. A penalty fee on a bank card or a bounced check fee, then again, aren’t interest. They are penalties, assessed for failing to follow the rules that the consumers agreed to follow. Writing a check with insufficient funds isn’t a loan, it is either a mistake or a crime. As such, the fee charged by the institution for doing so isn’t interest, and it is wrong to consider it as such. How strange that the NACCU would make those comparisons.

It is certainly true, though, that taking out a quick cash loan in order to avoid writing a bad check could save the consumer money, provided that he or she paid back the funds within the standard two week time period. The problem with this scenario is that many people who take out such loans are not able to repay the funds punctually, and that causes the fees to double. Such isn’t the case with a fee for an unpaid check or an disconnected power meter.

The report is certainly correct in noting that society has a definite need for short term cash loans. Sometimes, we are just a bit short before payday and the ability to borrow a small sum until then could be helpful. It might be more valuable if financial institutions such as credit unions could offer such solutions themselves, rather than leaving their customers to seek out  more pricey cash somewhere else.