Sharon Strahan was living paycheck to paycheck when her car needed an emergency repair. The divorced mother of two tried to get a loan from three banks, but they turned her down.

She believed a payday loan was her only option.

“I thought the payday loan was a source of survival, but the interest rate was eating me up,” Strahan says.

It’s a familiar story. Approximately 130 million Americans live paycheck to paycheck and don’t have the funds to cover a $400 emergency without taking out a loan, borrowing from friends or family, or using a credit card, according to the Federal Reserve.

Strahan visited a Hope Federal Credit Union branch near her home after she heard a radio advertisement about credit counseling. She was surprised when the credit union offered to replace her high-interest debt with a low-interest credit-building loan.

The Jackson, Miss.-based credit union launched “Borrow and Save” in 2014 to expand and update an existing small-dollar loan program. The program aims to help members build up both their credit score and savings account balance. If a member takes out a Borrow and Save loan for $1,000, Hope Federal issues $500 to them immediately, and then puts the other $500 in a locked savings account. Once the member pays off the full balance of the loan, the hold on the savings account is lifted.

Early adopter

Hope Federal is an early pioneer in offering small-dollar loans to help members avoid high-interest payday and auto title loans.

These programs almost always offer credit counseling and an opportunity to build up credit. Credit unions often offer these loans to people who would not qualify for loans elsewhere.

Consumers often turn to payday loans out of convenience. Branch managers at the $301 million asset credit union approve Borrow and Save loans, which expedites the process, says Felicia Lyles, Hope Federal senior vice president of retail operations.  

Hope Federal also considers nontraditional forms of payment histories when making credit decisions, such as a 12-month history of utility or rent payments. The credit union takes on the added risk of these loans because they see a huge need in the community, Lyles says, and so far, the benefits outweigh the risks.

From 2014 to 2018, Hope Federal issued 2,744 Borrow and Save loans for $500 or $1,000. Nearly 70% of the borrowers had credit scores of 599 or less, which makes them ineligible for loans at financial institutions other than payday lenders.

Hope Federal has charged off 24% of these loans. But Lyles says 40% of members who took out the loans were repeat borrowers who paid off the initial loan and qualified for new loans of the same or higher amount.

Next: Adding employees to the mix.