Credit Union “Borrow and Save Plans” Alternative to Bad Credit Personal Loans

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According to a recent article in the New York Times, credit unions are thinking about featuring “borrow and save” plans to turn borrowers into savers. A pilot test for the program, which was implemented by 12 credit unions, is showing promise, especially among consumers who are used to taking out bad credit loans.

According to Andrew Downin, who works at Filene Research Institute as a managing director of Innovation, “’Borrow and Save’ programs . . . tie small loans to forced savings [so the borrower establishes the savings habit].”

In February, the Filene Institute published research concerning the “Borrow and Save” product and similar programs. The “Borrow and Save” program was initially utilized by the National Federation of Community Development Credit Unions to assist customers with low and moderate incomes to get around the high cost of borrowing.

Savings for emergencies are often built to weather financial storms or to handle unexpected events. Studies show that just over 40% of U.S. households lack enough in liquid savings to cover an unanticipated cost, such as a $2,000 car repair. With no financial cushion on which to rely, a consumer can be hit with an expense he is not able to handle, such as a medical bill. As a result, he has to turn to a source, such as a payday lender, to cover the budgetary shortfall. If the consumer cannot repay their bad credit personal loans on the due date, then he often ends up borrowing over and over again in order to pay the high fees and interest rate.

Various credit unions can have different versions of the “Borrow and Save” program. However, the basic way the program works is as follows:

Usually, a part of the borrowed amount is set aside into a savings account and stays there while the borrower pays back the loan in designated monthly installments. For example, if you borrow $500 and the bank requires you set aside half that amount, $250 would go into savings. When you pay back the loan, you can access the savings.

In the pilot program conducted by Filene, loan amounts ranged from $200 to $2000 with savings amounts ranging from 5 to 50 percent. The loan terms extended from 90 days to one year. Freedom First Credit Union, which is based in Roanoke, Virginia, has been featuring a “Borrow and Save” program for three years. Credit union members are allowed to borrow up to $5,000 and agree, in turn, to set aside 50% of their money into savings until they pay the loan back.

Freedom First’s Senior Vice President for Community Development, Dave Prosser said that the credit union’s borrow and save program serves as a “bridge” for credit union members with poor credit. He elaborated, “. . . [Certain members] . . . may not be ready to handle . . . a $15,000 car loan. [Therefore,] Borrow and Save helps them establish a regular payment habit . . . and . . . [also] help[s] [them] build a down payment for a car.”

According to the news report, participating credit unions, in the pilot by Filene, issued financing to over 3,000 borrowers for an average loan amount of around $1,000. Savings, on average, was $290. Borrowers were surveyed afterwards and almost 95% said the financing helped with a financial emergency while almost 90% of the respondents said they would use the loan program again, if needed.

However, the long-term impact of the experiment is not together clear. About 25% of the pilot participants said they may still resort to using payday loans. The loan limits could possibly be too low for respondents taking advantage of the Borrow and Save plan. Nevertheless, nine out of the twelve credit unions in the test program said