A new line for credit unions

Last update: February 23, 2008 - 7:29 PM

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Credit unions are increasingly getting into the so-called payday lending business, offering the shorter-term, higher-interest loans in an effort to beef up membership.

Typically the terms are far more favorable than borrowers would get at a standard payday loan shop. And with community credit unions -- which typically open membership to anyone living, working, worshiping or studying nearby -- growing in popularity, such loans are an option for more borrowers.

"Salary Advance Loan" is what the U.S. Federal Credit Union on St. Paul's East Side calls its option, created about a month ago, according to branch manager Karen Drummer.

Loans run as high as $1,000 or 50 percent of the member's salary, whichever is less. Drummer said they work like this: Borrowers pay a $15 application fee for the 30-day loans. If they agree to a credit report consultation, they get that back. The loan has an 18 percent annual percentage rate (APR), but the credit union reduces it to 16 percent if the borrower agrees to set up direct deposit of his or her paycheck. On a $1,000 loan, that interest comes to about $15.

Drummer figures the credit union roughly breaks even on the loans.

The City-County Federal Credit Union has a similar program for its members, said North Minneapolis branch manager Ken Olson. Using the traditional name -- payday loan -- the credit union lends up to $500 at an 18 percent APR, which borrowers can repay in installments for up to a year. There is no fee, and interest on a $500 loan over 12 months would come to about $50.

This credit union requires the borrower set up direct deposit. Olson figures it loses about $50 on each loan, but a big part of their value is building membership.

Flexible credit is another way people avoid the necessity of commercial payday loans, consumer advocates said. Affinity Plus Federal Credit Union offers a Skip a Payment Program.

For a $30 fee, members can skip one monthly payment on an auto or home equity loan from the credit union, spokeswoman Katie Incantalupo said. "Life happens, and sometimes you just want to give yourself a break from that loan payment," she said, noting it's popular around the holidays.

H.J. CUMMINS

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