How Credit Unions Help You Avoid Payday Loans

When credit unions were established, they didn’t offer services that would rival payday loans. Credit unions are basically financial institutions where its members are also part owners. Members can deposit, withdraw or even loan money with a very low interest rate. Since it’s a non-profit organization, the earnings are evenly divided to its members.

To be a member of the credit union, all members have to deposit some amount so that it could be used as a contribution. There are credit unions that are small requiring a small amount of money to start and there are also credit unions that are nationally recognized and the small amount you deposit is a constitutes a share that will give you returns when the credit unions earn some amount through different ventures and loans.

Although credit unions can offer low interest rates, their loans are set up like the payday loan companies. Even though the loans come in small interest rates, the loans are too big for the small needs of its members. That is why the members of credit unions still go to payday loan companies so that they could loan a small amount of cash that could be easily paid on their next payday.

The convenience of payday loans covers the high interest rate which could place the borrower in a huge debt if the payment was missed. When the debt increases to exponential level, the credit union member is forced to loan to the credit union company just to pay off that debt. Although the credit union will earn money through loans, its members will live in debt which will defeat the purpose on why did the credit unions were set up in the first place.

To answer that problem, credit unions started to offer their own version of a “payday loan”. Their type of loan has a lower of interest rate and it is also a short term loan just like the payday loans. The annual interest rate of payday loan companies is at least 300% and could even reach 1000%.

The interest rate of the credit union on the other hand, only has an average 12% of interest rate. By the credit union standards, it is already a high interest loan. To prevent their members from abusing this type of loan, the maximum amount that could be loaned to its members are limited to usually $500 - $800.

This interest rate already looks good by itself but credit unions have even pushed the envelope further. Part of the earnings from the loan is not used by the company but placed in the savings account of the debtor. That means the more “payday loan” the member of the credit union has, the more money he or she places in the savings account. In a payday loan, you will never receive something back except for the feeling that you have paid more than what you should have.

Because of this practice of credit unions, more people have been walking away from credit unions. In your end, make it a point to be a member of a credit union before you end up in a financial crisis so that you will have someone to help you aside from payday loan companies.

Most cities have small credit union institutions that you can easily join. There are also large credit unions that you can join through online application. You should be able to join easily without any fear that your money will end up in nothing. Credit unions will take care of your money and they can easily provide you with a payday loan like service without the high interest rate.