Here’s How Low-Income Credit Unions Can Help You Avoid Payday Lenders

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Banks can be unaffordable unless you can meet the often prohibitively high monthly balance to avoid service fees.

But the alternative for many ends up being even more expensive — in the form of check-cashing services, prepaid debit cards and payday loans.

Americans who were unbanked (those without a checking or savings account) and underbanked (households that have an account but rely on alternative financial services, like the payday loans) spent $189 billion in fees and interest on financial products in 2019, according to a Financial Health Network study.

Based on the 2019 Federal Reserve report that 22% — or an estimated 72 million — of Americans are unbanked or underbanked, that comes out to an average of more than $2,600 in annual costs per person.

If you’re looking for a banking option that can deal in smaller-size accounts without charging scary-high fees, it’s worth your time and money to consider a low-income credit union.

Here’s what to look for when choosing one — and what to expect.

What Is a Low-Income Credit Union?

A low-income credit union, or LICU, is defined by its membership (credit unions are member owned and not-for-profit, unlike banks). If more than 50% of the members are low-income as defined by the National Credit Union Administration, a credit union can apply for membership.

“There are over 5,000 credit unions in the country, and a little bit over half of those are low-income credit unions,” said Pablo DeFilippi, senior vice president of membership and network engagement for Inclusiv, a national network of credit unions.

How Can a Low-Income Credit Union Help Me?

Let’s start with the basics: Having an account with a financial institution, in general, can save you money.

How? By maintaining an account with a bank or credit union, you receive certain services for free or for low costs:

  1. Cashing checks

    If you’re paying for check-cashing services every month, you’re paying a percentage of your check as a fee. If you have a checking account or share draft account (the credit union equivalent of a checking account), the bank or credit union will waive the fee it normally charges for cashing checks.

  2. Paying bills

    Using money orders or wire transfers to pay your bills? You could save by either writing checks from your account or using online bill pay options, which you can do if you have an account at a bank or credit union.

  3. Accessing your cash

    Skip the cash advance fees with sky-high interest rates. If you have an ATM card from your bank or credit union, you can withdraw cash from your account at one of its ATMs without a fee. (Just be sure to use your bank’s or credit union’s machines to avoid fees — and don’t overdraw on your account.)

Low-income credit unions typically offer these same services, but they also include products that are designed to help members who may not have a stellar (or any) financial history.

They may offer a prepaid debit card or a share draft account with a low minimum balance, for instance.

And for those who typically rely on predatory lenders, LICUs also offer loans that can help members establish credit and avoid the payday loan debt cycle.

How Do Low-Income Credit Union Loans Differ?

When it comes to personal loans, LICUs deal in smaller dollar amounts with lower interest rates, setting them apart from other credit unions and banks.

In addition to traditional personal, auto and sometimes real estate loans, LICUs lend smaller dollar amounts for short-term loans as part of the Payday Alternative Loans Program.

These loans of $200 to $2,000 offer an alternative to predatory loans. And the interest rates may sound high — capped at 28% — but that’s a fraction of what most borrowers end up paying to predatory lenders.

Pro Tip

To access services and products like loans, most credit unions require you to have been a member for at least one month.

Payday lenders don’t typically charge interest but charge fees based on the amount borrowed, which ends up being the equivalent of a triple-digit interest rate.

Fees for LICU loan fees max out at $20, with terms from one to 12 months — compared to the typical 14- to 30-day turnaround on payday loans.

Unlike payday loans, credit unions are not allowed to make more than one of these loans at a time or more than three in six months. By doing so, members can avoid rolling over loans and falling into the vicious cycle of debt — continually borrowing to repay the last loan.

And if you do fall behind, you’re more likely to find help for setting up a reasonable repayment plan at a LICU. Many credit unions even offer free financial counseling and education courses to its members, allowing you to learn how on-time payments for those loans can build or improve your credit score.

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How Do I Find a Low-Income Credit Union?

Regardless of how much money they have, most people don’t want to be associated with the term “low-income.” The same goes for financial institutions, which makes them a little tougher to track down.

“The trick is that of course nobody likes to bank at the poor people’s bank,” DeFilippi said. “So the low-income designation is not something that they promote.”

You can still find a low-income credit union — you just won’t see it advertised. One way to find one in your area is to search the NCUA’s credit union locator for your area.

Pro Tip

Similar to the FDIC for a bank, credit unions are insured through the U.S. government for up to $250,000 per deposit account through the National Credit Union Share Insurance Fund.

When the list of credit union options appears, select one and click “research.” Information about that credit union will appear, including “Low Income Designation.”

Alternatively, you can look for the CDFI certification (aka Community Development Credit Unions), which both banks and credit unions can apply for to indicate that their primary mission is to serve low-income individuals and communities.

And if you don’t have a traditional credit union branch in your neighborhood, DeFilippi recommended looking for “mini branches” that credit unions are starting to place within community-based organizations and financial empowerment centers.

By law, credit unions must have criteria for membership — if you don’t meet it, you can’t join. But many credit unions make the field of membership broad enough that almost anyone can find a way in.

Ready to sign up? Check out this article on how to join a credit union.

Tiffany Wendeln Connors is a staff writer/editor at The Penny Hoarder. Read her bio and other work here, then catch her on Twitter @TiffanyWendeln.