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Short-term Loans from Credit Unions May Have High Fees

[Aug 3, 2009.]


Payday loans were discussed in a recent post that focused on how people can become trapped in a cycle of borrowing by rolling over loans. But payday lenders aren't the only place people can turn to get fast loans. Some credit unions offer borrowers quick loans against their next paycheck, as an alternative to payday loans. But in some cases those loans may come with extremely high fees.

Loans Have Excessive Fees

The National Credit Union Administration (NCUA) has issued guidelines to credit unions about offering loans with excessive fees. Personal loans made by payday lenders often have extremely high interest that can reach around 300% or 400% annually. 

The Federal Credit Union Act caps the interest rate for loans at 18% on the unpaid balance. But some credit unions are charging fees that can drive up the annual percentage rate to well over 400%. "For example, a $10 finance charge on a $200 loan with a two-week term and a stated interest rate of 16.5% actually would have an annualized interest rate of nearly 150%, far exceeding the 18% ceiling," the NCUA wrote.

Loans Should Help Consumers

While many credit unions are interested in making small, personal loans to members, the NCUA says such programs should be designed to help consumers end their reliance on payday loans and guide them to credit unions' "more mainstream products, low cost financial products and services, including financial counseling."

Getting a Personal Loan

Here are some things borrowers should know about taking out a short-term loan from a credit union:

—Regulation Z (Truth in Lending) requires credit unions to disclose the terms and costs of a loan

—Reg Z defines finance charge broadly, so many fees charged when a borrower applies for a loan are considered finance charges

—Application and participation fees are excluded from Reg Z's definition of finance charges

Suggestions for Credit Union Loans

Lauren Saunders, managing attorney of the National Consumer Law Center, issued a statement suggesting:

—Credit unions cap annual rates on short-term loans at 36%, including fees

—There should only be one annual fee, an origination fee that direcly relates to a loan's origination costs and covers renewals throughout the year

—A minimum loan repayment period of 90 days or at least one month per $100 borrowed

—Multiple installment payments instead of balloon payments that lead to rollovers and more fees

Do Your Homework

Although some credit unions do charge excessive fees on short-term loans, there are many credit unions that have reasonable rates that follow the 18% guideline. Borrowers should ask about all the terms of short-term loans before applying to make sure they will be able to handle the payments.


About Author:

Francine L. Huff is a freelance journalist and the author of The 25-Day Money Makeover for Women. She has appeared on a variety of TV and radio shows.

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