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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.
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.
- What Level of Staffing Do I Need for My Credit Union Small-Dollar Loan Program?
- Overcoming Potential PR Issues from Credit Union Small-Dollar Loan Programs
- The Member Segments Most Affected by Credit Union Small-Dollar Loan Programs
- Measuring the Success of Your Credit Union’s Small-Dollar Loan Program
- Best Practices for Marketing a Credit Union Small-Dollar Loan Program