Nestled in an area where residents are relying more heavily on online payday lenders to get by, Liberty Savings Federal Credit Union ($68.5M, Jersey City, NJ) established a lower rate, short-term loan option to help members avoid spiraling down into financial disaster. And the new product has significantly strengthened the credit union’s loan portfolio.
“We are providing our members with a better and cheaper alternative to payday loans while helping to improve their credit and develop savings,” says Liberty Savings president and CEO, Jim Miller Sr. He said the credit union is striving to “ help our people become better consumers of financial services.”
Hudson County, a densely populated, compact area directly across the Hudson River from Manhattan, has one of the lowest median income levels in New York City’s metropolitan area. The median household income there is about 79.1% of the statewide average. The economy there is still struggling with high unemployment rates coupled with a housing market that’s more expensive than the New Jersey average. The state does not allow payday lending from its financial institutions, but to make ends meet, many Hudson County residents have been turning to payday lenders online.
Liberty Saving CU learned its members were using payday lenders there that could charge as much as $15 on a $100 loan, which is a 391% interest rate, says Karen Velasquez, marketing and business development officer at Liberty Savings. So, executives decided to offer its own smaller loan at a more reasonable rate – the Paycheck Advance Loan. The product coincides with the credit union’s 2012 motto: “Debt Happens.”
Members can get up to $1,000 with a choice term up to 12 months at an 18% fixed rate. If a member wants a $1,000 loan, the credit union gives the first $500 immediately to the member, while the other half gets deposited into the member’s savings account. That second $500 is kept in the savings account until the first sum is paid off. In this way, Liberty Savings is underscoring the value of saving and paying off debt.
“The idea is to help our members get out of that cycle,” says Velasquez. “We’re not just here to hand out loans. … We’re looking to meet the needs of our community.”
The small signature loans seems to have significantly benefited the credit union. Liberty Savings’ total loans increased 7.35% in the first quarter from the same quarter last year, as credit union’s nationwide averaged only a 2.1% increase, according to Callahan & Associates’ Peer-to-Peer data. Unsecured loans, excluding credit cards, account for 24.39% of Liberty Savings’ total loan portfolio, second to used auto loans, which comprise 28.79%. The percentage of these unsecured loans is about four times higher than its peer group average.
Liberty Savings had the fourth largest volume and number of unsecured loans, excluding credit cards, in its peer group of credit unions with asset sizes from $50 million to $100 million as of the first quarter. It reported $12.7 million in those unsecured loans, up from $11.8 million in the first quarter of 2011, and 3,877 unsecured loans total. Meanwhile, its delinquency rate has plummeted 5.8%.
Liberty Savings’ lending program offers members a variety of tiers for loan amounts. Its minimum loan requirement is $300, which is substantially less than many other financial institutions offer. It also offers a 0.25% rate discount if members participate in an online, self-pace study on budgeting and credit.
Velasquez said she and her administrative team developed the Payday Check Loan after noting opportunities in the lower income neighborhood, where Liberty has been certified to serve the underserved area since 2005.
“We didn’t know how underserved it really was,” says Jim Miller Jr., chief information officer.
While Liberty Savings does standard loans like mortgages and auto loans, it has now made a name for itself as a credit union willing to make small unsecured signature loans. In addition to the Payday Advance Loan, it offers smaller holiday loans and vacation loans. For Valentine’s Day, the credit union offers Sweetheart loans – $300 to $500 loans – so they can take their significant other to dinner or a Broadway play.
During the summer, Liberty Savings offers vacation loans. Under this year’s promotion, members can open a vacation club account to start saving for travel next year. If members start a payroll deduction – minimum $5 – the credit union will deposit the first $15 into the account.
Regardless of a member’s credit score, the cooperative financial institution services the loans, but then provides mandatory financial education.
“Small loans, even at relatively high rates with our risk-based price model, are very popular among our members,” says Miller. “Credit makeovers, secured credit cards, and other tools to build credit and develop good credit habits are also popular.”