In recent years, there's been explosive growth in the number of payday loan outlets in the United States. Large metropolitan areas have an outlet on every corner. Even the smallest country town has a payday loan outlet. These establishments, which charge exorbitant interest rates, focus on short-term loans to low-income people. In New Orleans, most payday loan outlets lend their customers $201 and require a personal check for $246 in return. The $201 repays the loan, and the $45 pays the fees. The loans are usually for 14 days or less.
If the customer's check doesn't clear, the outlet processes a loan for $ 246 plus a processing fee. This can then escalate to where the original $246 rolls over more than once. Additional fees and interest accumulate each time.
At ASI Federal Credit Union in Harahan, La., we hadn't realized how many of our members were using these payday loan outlets until representatives from the outlets came into our branches with envelopes full of checks our members had written. So, in 1999, we began work on an alternative to payday loans for our members. This product would provide a safety net to eliminate their need for payday loan outlets.
After researching all applicable regulations, we created the Stretch Plan. The Stretch Plan offers a line of credit up to $200. The plan requires a payment of $101 on the first payday following the advance. Another $101 is due on the second payday.
The payments cover principal and interest so the loan is paid in full after two paydays. We scheduled payments in this manner to achieve the plan's goal: tiding members over until payday.
The Stretch Plan membership fee is $3 per week. We deduct this fee from the member's savings account.
Stretch Plan membership includes additional benefits: an automated teller machine (ATM) card, money orders at ASI Federal Credit Union's cost, free one-party traveler's checks, a free phone card, a free checking account with overdraft protection linked to the Stretch Plan, and a 12% interest rate on the line of credit loan. Because members don't need to credit-qualify for this program, we believe they're more willing to apply.
In return, members are required to use direct deposit for the duration of their membership in the Stretch Plan. Plan payments are the first to be disbursed from the member's direct deposit. Members also are required to be with their employer for at least six months to qualify.
Since the plan's inception, ASI Federal Credit Union has expanded the Stretch Plan and added several options. One additional feature increases the member's loan limit. If a member has participated in the Stretch Plan for six months and paid on time, he or she can apply to increase the loan limit to $500.
Members who make their plan payments on time for six months also can advance to the next level: the Credit Enhancement Plan (CEP) or the Asset Builder Loan. These loans have higher limits and longer repayment periods.
ASI Federal Credit Union is able to make these small loans because they're open-ended and have minimal paperwork and service associated with them. Once members have established these loans, they use ATMs, phones, and the Internet to access their funds.
Loans in the above plans have grown significantly since 1999. By May 2001, 4,000 members had participated in the plans with loans totaling $1.4 million. The average loan balance is $350.
From ASI Federal Credit Union's perspective, it's a win-win situation. The members participating in the Stretch Plan aren't charged astronomical fees and the credit union is able to increase loans with minimal cost. If we're able to assist members by offering products that help them manage from one paycheck to another, then we've succeeded.
AUDREY CERISE is chief executive officer/president of ASI FCU, Harahan, La.
Audrey Cerise received the National Federation ofCommunity Development Credit Unions 'Ninth Annual Annie hamper Helping Hands Award for ASI Federal Credit Union's payday lending alternative loan program. Contact her at 504-7331733.
Copyright Credit Union National Association, Inc. Sep 2001
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