How Do Most Credit Unions Currently Offer Small-Dollar Loans

Currently, most reputable financial institutions do not offer small-dollar loans. Due to the predatory practices by payday lenders, many in the industry wish to steer clear. However, the regulation surrounding small-dollar loans is turning around on both the state and federal level.

So why are regulatory agencies taking a closer look at small-dollar loan programs? Because quick loans in and of themselves are useful, even critical credit union member services. They’re harmful only when predatory lenders charge anywhere from 300–800% APR on the borrowed sum, which can significantly impact a borrower’s financial viability.

More and more credit unions and other financial institutions are taking an interest in their members’ ongoing financial health. Offering small-dollar loans ensures that members aren’t forced to take their business elsewhere with interest rates in excess of ten times that of what credit unions would offer for the same loan amount.

Underwriting Small-Dollar Loans Isn’t Easy

While one of the primary reasons that most credit unions currently don’t offer small-dollar loans is because of the dubious reputation that other lenders have earned, there are other reasons why quick loan programs aren’t very popular: it’s not easy.

Loan Underwriting Takes Time

The process of underwriting a loan can take time. Unfortunately for small-dollar loan borrowers, time is often a precious commodity. Crises and emergency situations have a nasty way of pitting people against the clock. In times of drought, there’s often an accompanying drought of time.

Underwriting doesn’t just take time—it takes employee time. Loan officers are often well-scheduled as it is; adding another, higher-risk loan service stretches their time even further.

Small-Dollar Loans Aren’t as Fast as They Need to Be

Underwriting and approving a loan takes plenty of time, but so does funding the loan. From appointment to approval to cash in hand, borrowers could be looking at hours or days until they see the money they need immediately.

In trying and stressful times, such as a credit union member crisis, hours or a day could mean all the difference.

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But Small-Dollar Loans Are Still Necessary

Regardless of obstacles, credit unions should still consider offering small-dollar loan services to their members. While the quick loan industry’s reputation was tarnished by predatory lenders, the service itself is increasingly necessary.

For the last several years, the number of Americans living from paycheck to paycheck is on the rise. Almost 80% of full-time employees live paycheck to paycheck—that number doesn’t take into consideration people who work part time or are unemployed.

More than half of Americans have less than $1,000 in their bank account. When considering the cost of an ambulance ride, a broken car, or a sudden loss of income, that $1,000 will probably prove insufficient. Credit union small-dollar loan programs can go a long way toward supporting members during trying financial times.

Make It Easier

For credit unions looking to expand the critical member services, small-dollar loans are an important step.

Partnering with a forward-thinking, credit union-based fintech may make it easier to support a small-dollar loan program. With such services, members can have a fully approved loan with immediate access to funds in as little as six clicks and 60 seconds of time. To learn more about small-dollar loan programs for your credit union, follow the links below. Or, if you’re looking for a way to help your credit union members through any crises they have, financial or otherwise, check out our Member Crisis Guide.

What are the Most Common Reasons Credit Unions Members Use Small Dollar Loans?

How Can Quick, Small Loans Help Members Affected by a Government Shutdown?

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What are the Most Common Reasons Credit Union Members Use Small Dollar Loans?

The best-laid plans of mice and men often go awry. At least, that’s how the saying goes. And unfortunately, there’s at least a kernel of truth to it. No matter how well one plans and budgets, there’s always a chance that cash flow can be interrupted. That’s where small-dollar loans come in.

In general, small-dollar loans have a dubious reputation among financial communities. However, this reputation is the result of predatory lending practices by institutions who gouge customers to the tune of 400–800% APRs. At exorbitant interest rates like these, borrowers may end up losing more money than they borrow.

However, responsible lending practices, like those employed by credit unions, serve members rather than hurt them. There are numerous reasons why a credit union member might need a small-dollar loan.

Living Paycheck to Paycheck Hurts

A recent study showed that more than 75% of Americans who work full-time are living paycheck-to-paycheck. That’s workers with full-time jobs—it doesn’t include part-time, underemployed, and unemployed Americans, who tend to be at higher risk with respect to financial liquidity.

Over 75% is a massive portion of Americans who don’t have sufficient savings to cover unexpected emergencies in their lives. Without a buffer of money in a savings or deposit account, most Americans are in danger of running out of money at the first setback.

Few people are completely safe from a single—or indeed, a series—of unfortunate events like the following.

Car Troubles, Anyone?

The best part about owning a car is how many avenues it opens up, pun definitely intended. The worst part of owning a car are the upkeep costs.

That sudden smoking hood, major fender-bender, or blown tire cost more than just mobility. It can also mean hundreds or thousands of dollars in towing, repairs, and missed income opportunity. Credit unions providing small-dollar loans can mitigate some of the disaster fallout by providing quick and necessary repair money.

Unemployment Isn’t Funemployment

The worst kind of surprise is a surprise layoff, and unfortunately, it’s fairly common. Any employment-related issue, such as missing a week for sickness or jury duty, or getting laid off or fired, can significantly impact a person’s daily cash flow.

The trick is, bills don’t go away when the income does. Even for credit union members who are between jobs, a short-term, small-dollar loan can help them make ends meet while they wait for their first paycheck.

When Lightning Strikes

It doesn’t have to be lightning. It could be a hurricane, or a tornado, or a wildfire, or a house fire, or a flood. Disaster scenarios can completely destroy a person’s or a community’s livelihood almost instantly.

Credit union small-dollar loans can help members pay for temporary relief while they wait to rebuild their lives.

Other Emergencies

While there is a limit to what kind of emergencies a credit union member might face, it’s not in the scope of this article to find that boundary. It could be a skiing accident, a sick child, or any number of significant setbacks.

When monetary liquidity is threatened, small-dollar loans can help people get back on their feet.

Should Credit Unions Get in the Small-Dollar Loan Business?

Short-term and small-dollar loans are an important member service. Certainly it’s unhealthy for members to rely on small-dollar loans on a monthly basis, but for members who have suffered some kind of emergency or major interruption to their cash flow, a credit union-offered quick loan can make the difference between a financially healthy member and a destitute one.

Credit union members without access to small-dollar loans may turn to predatory payday lenders instead, which will further hinder their financial viability in the future.

To learn more about how small-dollar loans can help credit union members in times of severe financial distress, check the links below, or download our Member Crisis Guide.

How Can Quick, Small Loans Help Members Affected by a Government Shutdown
Payday Loans Good or Bad for Borrowers?

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