According to some, lending to people with bad credit must carry a high interest rate. The risk of default is high and this risk is highest at the beginning of the loan.
Short-term lending must feature a high interest rate because the default rate will not decline during the loan period. Small loans are also very labor-intensive.
This overhead costs money. However, credit unions are financial institutions that are already paying this expense and spreading it over multiple products.
Credit unions also have a much lower cost for funds. They can even take deposits, paying little or no interest in return. Payday lenders are small, mainly unregulated organizations that must pay a hefty price to borrow money.
A portion of the interest they charge covers these costs. If their expense for funds was lower and their overhead costs were covered, they would most likely lower their rates.
Payday lenders are in business to make money, while credit unions are non-profit entities created to serve shareholder-members. If these members need payday loans, then the establishment should provide this financing, even if it is not a profitable move.
More people are starting to believe that credit unions should provide payday loans at zero profit or even a loss.
Credit union members requesting payday loans are usually those who need money the most and cannot afford expensive financing.
Many people would take comfort in knowing that if they fell on difficult financial times, their credit union would be there for them.
The North Caroline State Employees’ Credit Union is blazing the trail, offering a salary advance loan with a reasonable interest rate.
