ALEXANDRIA, Va. (1/7/14)--"With the right products and rules of the road, credit unions and other financial institutions can help millions of cash-strapped Americans break free of their reliance on expensive loans...and replace a cycle of debt and dependency with one that meets borrowers' short-term needs while promoting greater financial security in the long run," National Credit Union Administration Chairman Debbie Matz wrote in a Huffington Post editorial.
Matz in her column noted that while payday loans are sometimes touted as a lifeline for consumers dealing with unexpected expenses, the truth is that nearly 70% of first-time payday loan borrowers use the funds to pay for recurring expenses such as rent, utilities or food.
More than 12 million Americans take out payday loans each year, spending more than $7 billion on principal, interest, and fees, Matz wrote. The average payday borrower pays more than $500 in finance charges and spends five months in debt for the average $375 loan, she added.
"When you consider that most of these loans are taken out to cover monthly expenses--yet only one in seven borrowers can afford to repay that average payday loan from their monthly budgets--it's easy to see how loans that are billed as 'lifelines' more often function as anchors, sinking borrowers into debt from which they cannot escape," she wrote.
However, Matz said, "there is a workable solution to providing short-term credit in a way that protects consumers and is viable for financial institutions." The regulator noted that under NCUA guidelines, federally chartered credit unions are allowed to charge no more than 10 percentage points above the established usury ceiling--currently, the statutory maximum is 28%.
Most credit unions that offer alternatives to conventional payday loans also limit fees, encourage members to open savings accounts and provide financial counseling. For more on payday loans in this issue of News Now, see "Some Big Banks Allegedly Ignore Nov. Payday Loan Guidance."
For the full Huffington Post column, use the resource link.