Unlike traditional banks that advertise and function as profit-making bodies, credit unions are not-for-profit organizations. They are community oriented and serve its members as opposed to banks which cater to its shareholders and owners. Most people join credit unions so as to avail of the personalized service. It may also be noted that all the earnings accumulated by a credit union while conducting business are utilized to benefit its members.For example, members may be given dividends or the cost of financial services may be decreased.
Identification of credit unions
Credit unions are non-profit, co-operative bodies, operated and owned by its members. They function by serving its members via low-charge savings accounts, provision of loans with low interest rates, and offer of other financial services. The members pool in their assets into the union, thereby making the funds available which can then be used to give loans to each other.
Credit unions were founded by a group of traders in the mid-1800s in Rochdale, England. They wanted to pool in their resources to purchase goods in large quantities and at discounted prices. Such goods were then made available to its members at fair prices.Over the next fifty years, this idea spread to Canada, Germany, and the United States, and continues till today. A number of smaller credit unions in America have merged with larger unions. As per data offered by the Credit Union National Association or CUNA, credit unions currently have a total of nearly 85 million members.
The general function of credit unions
Credit unions cater to the needs of a group or groups of workers, people from a specific community, or members of an association or organization. They encourage regular savings and judicious borrowing for educational purposes, big-trade items, and emergencies. Thus, the members secure their financial security and welfare.
The standard services offered by credit unions
Credit unions provide savings/share accounts, debit and credit cards, checking/share draft accounts, lending programs which include real estate loans, guaranteed student loans, personal, retirement accounts, and member business loans. Their services and products are fairly priced, while loans and savings have competitive interest rates.
Basic features of credit unions
A credit union is managed by a board comprising of elected member volunteers. As compared to this, a conventional bank is run by a remunerated board of directors. Churches, employers, local communities, as well as schools may sponsor a credit union. Credit unions sponsored by workers generally permit the family members of an employee to join as well.
Accountability of credit unions
The NCUA or National Credit Union Association monitors and charters all federal credit unions. The NCUA mandates some rules of operation and organization that have to be adhered to by all federal credit unions.The association also offers insurance to the account members of credit unions via the NCUSIF or National Credit Union Share Insurance Fund, which has the backing of the government.It may be noted that a majority of credit unions are federally insured. Uninsured unions have to report to the NCUA.
As big commercial banks have tightened lending requirements and credit standards in recent years, credit sources outside of the traditional finance industry have grown immensely. Individuals who need cash on a short term basis are increasingly turning away from their banks and toward different sources to meet their immediate financial needs. Among the most recognized and commercially popular of these sources is the payday lending industry. Tens of thousands of payday loan storefronts and dozens of websites have sprung up as lenders meet the demand of consumers looking for short term credit.
Payday lenders specialize in short term loans at or under roughly $500. They are designed to tide an individual’s cash needs over until their next paycheck. As such, most payday loans have a term structure of two weeks, with the repayment date coinciding with the day the borrower receives his or her paycheck. On the day of repayment, the borrower pays back the principal of the loan plus a fee that serves as the lender’s interest. It is usually expressed in dollar terms instead of a traditional interest rate. That is, a payday loan provider might charge a flat $10 to $20 for every $100 borrowed over the two week term. As it is still fairly new, the payday loan industry is largely subject only to regulations at the state level.
Though the effective interest rates are relatively high compared to standards in the traditional finance industry, many find that the relaxed credit standards and availability of payday loans are the best or only option. These people have fueled the rise of the payday loan industry, making it a very large and very profitable business.
Research conducted by the Pew Charitable Trust in 2012 revealed just how big the United States payday loan industry has become. That year, $7.4 billion was spent on short term credit from payday lenders. The same study found that 5.5% of all adults in America have taken out a payday loan. The demographic characteristics of the borrowers represent a wide swath of the population. Borrowers are nearly evenly split between men and women, representing 48% and 52% of the total respectively. Caucasians represent 55% of those who have used payday loans.
Though it is not seen by regulatory agencies like the Consumer Financial Protection Bureau as particularly favorable, the payday lending industry does seem to meet legitimate consumer needs. In the Pew Charitable Trust study, a survey of individuals who have taken out payday loans showed that short term credit was a buffer before more dire options would need to be explored. Respondents at large said that without payday loans, they would put off paying bills, ask family and friends for money, or begin disposing of their assets to meet their immediate needs for liquidity. As long a segment of the population remains under banked and in need of credit, the payday lending industry will likely remain a viable option.