Short-term loans are in demand. According to a recent WallStreet Journal report, payday lender and pawn shop shareprices jumped in October. Some credit unions are taking thisopportunity to provide similar products, but at a lower cost andwith a different philosophy in mind. While payday lenders encouragerepetitive short-term lending, credit unions present short-termloans as emergency-only solutions.

Credit unions that offer short-term, high-interest loans valuedanywhere from $1,000 to below $500 recognize the product is bothrisky and low on profits. But they’re on their menus to fulfillmembers’ needs, and hopefully serve as stepping stones for membersaiming to improve their financial situations and move ontolower-cost loan products, CU executives say.

The Lincoln, Neb.-based, $145.2 million Liberty First CreditUnion is one of six Nebraska CUs participating in QuickCash, ashort-term loan program organized by the Nebraska Credit UnionLeague. The QuickCash loan is a $500 loan that comes with a flat fee of$20, 18% interest rate and pay-back term of 60 days. To qualify,the borrower must have been a member of the credit union for atleast 30 days and provide proof of income. A credit report is notrequired, and there’s no penalty for paying the loan off early.

Liberty First CU CEO Ken Bradshaw said Nebraska’s payday lendersallow customers to refinance or roll over short-term loans, whichcan spur an ongoing cycle of debt, while QuickCash loans areintended to provide a temporary fix.

“We’ve been wanting to do an alternative to a payday lender loanfor a while,” Bradshaw said. “We ran into some members who had goodjobs but were getting caught in the payday lender cycle, and theywere between $2,000 and $4,000 in debt. I was glad that we couldfinally sit down and work something out. If we make a little money,fine, but the point is that it helps the community.”

Since Liberty First CU holds its short-term loans on its ownbooks, as opposed to offering them through a CUSO, it faced thechallenge of writing its own loan policies and procedures that fallwithin NCUA’s short-term loan guidelines. To develop the policiesand procedures, Bradshaw said he met with another Nebraska creditunion, which had created its own short-term loan program and is notparticipating in QuickCash, for guidance.

Risk is another burden CUs in the short-term loan businessencounter, and credit unions that don’t want to assume the risk cansign on with a CUSO, such as XtraCash LLC, a Lenexa, Kan.-based subsidiary of the MazumaCredit Union-owned CU Holding Company, LLC.

XtraCash currently works with nine credit unions, providingtheir members with loans that are structured like payday lenderproducts but cost less. The CUSO assumes the risk for the loans andhandles all compliance issues. Its CU partners are paid quarterlybased on the loan volume generated. The product is also set up toproduce some noninterest income for the CUs.

XtraCash Managing Director Lon Neofotist, who spent more than 13years working in the payday lending industry, said his partnercredit unions view short-term loans as vehicles for movingstruggling members onto lower cost, mainstream CU loanproducts.

“There are a number of credit unions that don’t want to offershort-term loans because of the stigma that’s associated withthem,” Neofotist said. “But their members are getting these typesof loans from somewhere, so they might as well offer them in-house.Hopefully, they can educate their members about how to get out ofthe cycle.”

Neofotist highly recommends CUs work with a CUSO for theirshort-term loan programs, as the loans are very high-risk. “Myguess is that most credit unions (that carry short-term loans ontheir own books) either break even or lose, and their members aretaking those losses,” he said.

The Orlando-based, $53.2 million Central Florida Postal CU, oneof XtraCash’s nine CU partners, signed on with XtraCash tosupplement the short-term loan program it already had in place, CEOJim Weibert said. The CU’s own program offers short-term loansin amounts of $500 and up, and XtraCash’s program servesmembers looking to borrow less than $500.

Central Florida Postal CU’s in-house short-term loans come withan application fee, an 18% interest rate and a six-month paybackterm. The CU’s XtraCash loans are paired with two-week paybackterms and flat fees instead of interest rates, which amount to lessthan what payday lenders charge, Weibert said. XtraCash borrowerscan use an online application process and are required to bringdocumentation into a branch for their initial loanapplications.

Weibert said while these loan programs do not produce largestreams of income for the CU, they allow members to acquireshort-term loans at a low cost. Central Florida Postal alsoprovides counseling, which gives recipients of short-term loans achance to improve their financial situations.

“The last thing we want to do is put them onto one of theseloans,” Weibert said. “We want to put them onto a product that willcost less. But if they go to the guy on the corner, his job is toget them that money, and get them to come back again andagain.”

He added members can view a short-term loan as an opportunity toprove they may be ready to take on a traditional credit union loanonce the initial loan is paid off.

“If a member can demonstrate to me that they can pay back ashort-term loan, that might be what I need to hear to put them ontoone of our lower cost products,” he said.