When a member needs cash now, Freedom First Credit Union ($453.0M, Roanoke, VA) offers a way for its members to quickly and conveniently borrow money. But this twist on the payday-style loan has a built-in, behaviorally driven savings component.
“There is always an immediate need for funds to address an issue,” says Dave Prosser, senior vice president of community development. “A car repair, clothes for back to school, or the general household crisis.”
These members often have credit issues and are not ideal borrowers. So Freedom First debuted Borrow and Save in the second quarter of 2012 as a way to meet the financial needs of its membership, provide fast cash with affordable interest payments, and contribute to borrowers’ future financial wellness.
Borrow And Save: A Hybrid Product
As part of the Borrow and Save program, Freedom First offers loans of up to $5,000. It holds half of the loan balance in a savings account until the borrower pays down the other half.
CU QUICK FACTS
Freedom First Credit Union
HQ: Roanoke, VA
Data as of 09.30.16
12-MO SHARE GROWTH: 20.7%
12-MO LOAN GROWTH: 6.3%
According to Prosser, similar programs at other credit unions make the funds parked in the savings account available to the member as they pay off the balance of the loan.
With Borrow and Save, Freedom First holds the funds in the savings account until the members pays the loan in full. During this time, the CDFI-certified credit union pays interest of less than 1% on the savings. It might be small, but it's a start.
Borrow and Save is an asset-building program that helps members “plan for the next crisis that comes along,” Prosser says. It is meant to keep members out of a situation where they continually borrow hundreds of dollars for car repairs and similar situations. The savings they’ve built through Borrow and Save can prevent the payday loan churn.
However, if a borrower does need immediate access to saved funds before the loan payback is complete, the credit union will assess the case and might re-underwrite the loan.
“That’s why Borrow and Save appeals to us,” Prosser says. “It addresses some immediate needs, but it’s also a way for people to get on the right pathway and reestablish credit, reduce debt, and build assets. It’s a nice hybrid product in that capacity.”
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Putting Members On A Pathway
Freedom First offers Borrow and Save to members as an alternative to a loan for which they applied but were denied. It does little to actively market the program, and it doesn’t have plans to increase its advertising efforts in the future.
“We use it to get people in a situation where we can put them in a car loan or on the pathway to homeownership,” Prosser says.
To qualify for Borrow and Save, members need to have been with the credit union for at least 30 days, been in their current job for at least 90 days, and can’t have filed for bankruptcy in the past 12 months.
There is no minimum credit score, but the average score is 582, and approximately 28% of members in this product had no credit score at all, according to Prosser. But Borrow and Save provides an avenue for members to build member credit and graduate into more traditional loan products.
“It’s not for those that are just looking for the quick handout,” Prosser says.
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And although Freedom First does not make financial education a requirement for Borrow and Save, the credit union offers financial education to interested members through its internal Advice Center.
According to Prosser, from the product’s inception to year-end 2015, the credit union has offered 622 Borrow and Save loans for a total of $1.28 million — $649,000 of which it put into savings accounts. The average loan size was slightly more than $2,000 and the program has a 4% loss ratio. As for borrowers, 83% of borrowers are low income and 13% are moderate income.
Borrow and Save wasn’t designed for us to make a lot of money. It’s a product that fits within our wheelhouse and helps us serve the underserved market.
The Future For Borrowers And Savers
Although it designed Borrow and Save to build credit scores, Freedom First did not have a reliable way to track the progress of borrowers. That changed in February 2016 when the credit union joined a pilot program with Pathways to Financial Empowerment, an initiative that measures the impact of credit union financial counseling for low-income consumers.
The credit union doesn't yet have the hard data to illustrate the program’s success, but Prosser says anecdotally he has seen a number of Borrow and Save members graduate into higher-dollar loan products, including the credit union’s Responsible Rides auto loan product for low- and moderate-income members, as well as its affordable housing program.
“We can get a good, positive trend on their credit report if they’re making payments on time,” Prosser says. “That’s improving the credit score.”
When a member takes advantage of Borrow and Save, the credit union tries to expand the relationship in a way that will continue to benefit the member’s finances, whether through direct deposit or an auto transfer.
That’s where behavioral economics comes into play. According to Prosser, when members see a nest egg in their bank account, they want to keep it growing. The credit union simply stresses the importance of continuing to contribute to it.
In the years since starting Borrow and Save, Freedom First has seen firsthand how important these funds are for individual households and how the program has addressed some of the predatory practices in the credit union’s community.
“Borrow and Save wasn’t designed for us to make a lot of money,” Prosser says. “It’s a product that fits within our wheelhouse and helps us serve the underserved market.”