Credit unions help military with new short term loans

The payday loan industry has long been under fire for seemingly preying upon the military. The stores, which offer short term loans with interest rates that can range from 250-1000% per year, seem to be everywhere. But nowhere are they more common than near military bases. The costly loans, which are intended to help tide borrowers over until their next payday, seem to be ideally suited to the poor pay and relatively poor financial skills of enlisted personnel. 

In Arkansas, the problem is largely gone, as the state has finally persuaded large payday loan companies to leave the state. Arkansas has some of the most restrictive interest and lending laws in the United States and the companies had been openly defying those laws for years. In March 2006, they finally agreed to stop doing business in the state.

The companies may be gone, but the need for small, short-term loans is not. The reason that these quick cash lenders do so well as an industry is not that the public has a desire to borrow money at 500% per year. The reason is that the public has a need for short-term cash from time to time. It just so happens that for a certain segment of the population, with poor credit and little income, payday loans were the only option. That group tended to include soldiers as well.

In order to fill the void created by the departure of the cash advance industry, three Arkansas credit unions have instituted short-term loans of up to $500 to help enlisted personnel meet the occasional shortfall. The loans are part of larger plans to both help the military financially and to help wean soldiers from the expensive payday loans. One plan has a 12% interest rate, a nice departure from the 391% often charged. That plan requires that a portion of the funds borrowed be placed in a savings account. Another credit union requires mandatory counseling if a borrower takes out the loans too often.

So far, the system seems to be working, and borrowers have been quite good about repaying on time and refraining from using them more often than is necessary. This, too, is a change from quick cash loans, where borrowers frequently had to borrow money from more than one lender in order to repay the amount they borrowed. A customer would borrow from one store and then do it again from a different store two weeks later in order to repay the first one. This occasionally led to cases where an advance of just a few hundred dollars turned into debts of thousands of dollars.

Those who oppose the pricey cash advances hope that more banks and credit unions will begin to offer alternatives to expensive short-term lending. The demand is there; it’s just a matter of the banks and credit unions offering the product that the public wants.

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