How Credit Unions Can Justify APRs over 18% for Small-Dollar Loans

Usuriously high interest rates earned the short-term credit industry a very bad reputation. Generally speaking, loans with greater than 18% APR are bad for borrowers. Yet, credit union small-dollar loan programs can justify charging more than 18%. How?

There are a couple reasons why credit unions can—and should—get away with charging higher interest on short-term loans. As you can probably surmise, the reason has little to do with making money at their members’ expense.

It’s a High APR Compared to… What?

APRs exceeding 18% sound high at first. However, they’re only high when you compare them to different loan types.

There are many loan types that make short-term loan rates sound untenable. For example, most of these common loan-type rates are well below 18%:

  • Student loans (4–8%)
  • Mortgage (under 5%)
  • Auto loans (under 5%)
  • Personal loans (10–16%)
  • Credit card rates (0–28%)

It’s rare for any of the above loan types to exceed 18%. In fact, for some of them, it would be historic to see rates that high.

However, the last two loans listed tell a slightly different story. Personal loans creep up into higher percentage rates, and credit card rates can get pretty high as well.

Credit union small-dollar loan interest rate from qcash

Where Loans Make Money

Student loans, mortgages, and auto loans have low interest rates for two reasons. First, they’re relatively low risk for lenders. Second, they make their money over long periods of time.

Long-term loans pay for themselves by collecting interest over years or decades. They don’t need to recoup overhead or potential losses immediately. On the other hand, personal loans and credit cards are present more short-term risks. They need to charge more interest to recoup overhead and potential losses.

Small-dollar loans at credit unions are even more immediate than personal loans, and they tend to cover emergencies. As a result, they need higher interest rates to recoup the costs of underwriting and funding the loan, as well as cover any potential losses.

Comparing Credit Union Small-Dollar Loans to Other Loans Is Wrong

Comparing small-dollar loans to mortgages is like comparing apples to oranges. Actually, it’s more like comparing apples to peacocks. Or comets.

The point is, it’s not useful to compare the interest rates of different types of loans. Instead, it makes more sense to compare credit union small-dollar loan rates to payday lenders’ short-term loan rates.

For the small-dollar loans, credit unions charge between 16-36% APR. For nearly the same service, payday lenders in some states can charge more than 600% APR.

When comparing apples to apples, credit union small-dollar loan program interest rates are more than fair.

Other Considerations

It’s important to remember that short-term credit serves a serious member need. Members who need emergency funds have few alternatives. If credit unions don’t offer the service, another lender will, and it could lead them down a slippery slope to a debt spiral.

Credit union small-dollar loan programs are about giving their members a safety net. At any time, medical bills, car trouble, or a sudden loss of income could make it difficult to meet rent or buy groceries. Credit unions can meet that need by providing short-term financial assistance to their members.

Further Reading

If you’d like to read more about credit unions and small-dollar lending programs, follow the links below. Or, if you’re curious about how you can help your credit unions when they need you most, download ourMember Crisis Guide.


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

How Does a Credit Union Overcome the Potential Brand Implications from Implementing a Small-Dollar Loan Program?

Leave a Reply

Your email address will not be published. Required fields are marked *