The Dark Side Of Credit Unions

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[credit provider=”Daniel Goodman / Business Insider”]

Before you join the 650,000 people who’ve already flocked to credit unions in the mad rush to ditch commercial banks, you should realise the new financial marriage isn’t as rosy as you thought.

The main gripe California Watch, a centre for investigative reporting, cites relates to how many credit unions offer small short-term loans with high interest rates called payday lending.

The National Consumer Law centre singled out 24 credit unions of about 7,000 nationwide that provide these kinds of loans, which target the poor and can lead to a terrible debt cycle.  

Other credit unions make customers pay very high application fees to get around the capped interest rates imposed by federal regulators. Kinecta Federal Credit Union, now one of the largest payday lenders in L.A., for example, engages in these types of price gouging tactics, according to the law centre report.

David Small, a spokesman for the National Credit Union Administration, responded to the report by saying federal credit unions “fulfil their statutory mission to promote saving and meet the credit needs of consumers, particularly those of modest means.”We wouldn’t bet on the payday scheme, but no matter what, you should make sure the credit union you’re considering is federally insured. Some credit unions aren’t–it depends on each state–and if your union isn’t and it fails, you could easily lose all your money. 

Other credit unions are insured by private companies. That’s still a risk, especially because in California, for example, 13 are backed the same firm. If too many of the credit unions go under, the insurance company won’t be able to support them all.

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