Alternatives Federal Credit Union
Payday Credit Plan, Ithaca, NY
New York State does not have a legally established payday lending industry, so the kinds of storefront payday lenders that flourish in cities and towns in other states across the nation are not seen there. But according to Tristram Coffin, CEO of Alternatives Federal Credit Union, payday lenders still do business in New York, both online and through a small, underground payday loan industry, and they are finding a ready audience for their services.
“The members of our credit union are predominantly low-income or very low-income people who often need short-term financing in order to make ends meet,” Mr. Coffin says. “So they are more predisposed to look for that sort of loan.”
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The problem with payday loans is not just the high-interest rate and fees. The short repayment term— typically one week to one month—makes it hard for cash-strapped borrowers to repay their loans and to pay their basic expenses. As a result, many borrow again and again. “They get trapped in a cycle of repetitive borrowing,” Coffin says. “That leads to paying interest this month on last month’s loan, which ultimately leads to paying far more back in interest and fees than they borrowed in the first place.”
As a CDFI dedicated to building wealth and creating economic opportunity for underserved people and communities, Alternatives Federal Credit Union was determined to offer its members a better choice. In 2007, the organization launched its Payday Credit Plan as an alternative to payday loans. The plan works much like a line of credit. Members can borrow whenever they like, but must pay off the amount with their next paycheck or benefit check. The Payday Credit Plan carries a $40 annual fee and an 18 percent interest rate—a bargain compared with the staggering rates payday loans charge. And five percent of each loan is deposited into a savings account for the borrower to help encourage savings.
Mr. Coffin says that the Payday Credit Plan is enabling members to meet their needs for emergency cash at a fraction of the cost they would pay a payday lender. But that’s only part of the plan’s value. “We have an opportunity to integrate consumer credit counseling in our delivery of the service and to help people deal with the root causes of why they need a short-term loan in the first place,” he says. “By providing education about borrowing and then having our Payday Credit Plan as a fallback for emergency situations, we are better positioned to help people avoid the trap of recurring use.”
