By Laura Enock

September 8, 2009

Credit Union Management's "Teaching Smart Money Management" column runs the second Tuesday of each month.

Payday loans are bad, right?

You want your members to stay far away from them and you would never ever consider offering anything remotely similar at your credit union. Financial education should include a little talk about the evils of payday loans and those who offer them, and then leave it to members to get themselves out of a payday lending cycle … and stay that way.

Not so fast. While being stuck in a payday lending cycle is not going to help any of your members in the long term, and many members do need to understand how high the interest rates are, there is a time and place for these loans. XtraCash LLC, the CUSO established by CUES member Rob Givens, president/CEO of $351 million Mazuma Federal Credit Union in Kansas City, Mo., has granted over 9,500 such loans in just over two years.

Payday loans? From a credit union? Well, yeah. But if you look at how XtraCash handles "sales," you see a model for how payday lending should be offered so it really is in the best interest of your members.

If a member comes in for a loan, XtraCash will try to see if they can get by with a smaller loan amount. The loan officer will also offer alternatives, if any exist for that member, in the form of a signature loan or something similar. The goal is not more loans, higher loan amounts, or anything that will be profitable for the CUSO. Not at all. The goal of XtraCash is simply to help members who need these loans to get these loans, but also to understand what they're doing and what it's really going to cost them.

It's wonderful that Mazuma FCU has taken this step, but not every credit union is prepared to open a CUSO. However, what every credit union can do is acknowledge the possible need for payday loans and educate members not only on the evils of payday lenders, but on the alternatives and how to get out of using them or avoid them if possible.

One way to teach members is using humor, such as a comic strip telling the story of a family and a payday loan cycle. In the story, the credit union becomes the hero by pointing out the problems of the payday loan and offering an alternative. Your credit union can include something like this in a newsletter or on your Web site.

There are other ways too. Personal financial counseling. Classes. Articles in your newsletter or on your Web site. But one way or another, whether you offer alternatives or not, payday loans should be right up there in your financial literacy curriculum next to budgeting.

Members may need payday loans. In fact, there may be no alternatives for some of them. But a financial literacy program should include a full explanation of what a payday loan is, what it costs (interest, fees, etc.) and other possible options offered by the credit union or other sources so your members can make an educated decision. And if your credit union can offer the support members may need to break the cycle and cut dependency on these loans, you're in the perfect position to serve as their advocate and keep them moving in the direction of having strong personal finances.

Laura M. Enock is CEO of CUVA and publisher of www.CUcontent.com, a newsletter and Web site content service for credit unions. She can be reached at laura@CUcontent.com.

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