Some short-term credit union loan rates may be high

You need money, and you need it fast. You've already pawned your saxophone. Friends with money won't return your calls.

One option is to get a payday loan, a short-term loan against your next paycheck. Payday lenders typically don't require a credit check, making them an easy source of quick cash. But annual interest on these loans often runs as high as 400%, and many borrowers who use payday loans to meet a short-term cash crunch end up with long-term debt.

An alternative is a loan from your credit union. In recent years, many credit unions have launched short-term loans for their members. The products were created in response to concerns that many low-income credit union members were relying heavily on payday loans.

Ideally, a credit union loan should offer a low-cost alternative to a payday loan, and many do. But before you sign up, scrutinize the details. Some credit union loans "are only marginally cheaper than traditional payday loans," says Lauren Saunders, an attorney with the National Consumer Law Center. Other credit unions have lent their names to third parties that are offering payday loans, the NCLC says.

The NCLC cited several examples of what it believes are high-cost credit union loans, including:

•Kinecta Federal Credit Union in Manhattan Beach, Calif., claims to offer short-term loans with a 15% annual percentage rate, but charges fees that raise the effective APR to 275%, the NCLC says.

In an e-mail, Kinecta spokeswoman Laura Oberhelman said the credit union's loan is competitively priced and in compliance with federal regulations governing such loans. In many cases, Oberhelman said, a short-term loan is less costly than paying overdraft fees on a checking account or re-establishing service with a utilities provider.

Kinecta also offers borrowers a free savings account in an effort to wean them from payday lending, Oberhelman said.

•The GoodMoney loan developed by Prospera Credit Union of Appleton, Wis., charges a fee of $9.90 per $100 for a 14-day loan, which works out to an annual APR of 252%, the NCLC said.

The GoodMoney loan differs from traditional payday loans because borrowers who can't repay the balance in two weeks can work out a plan to stretch out the payments, says Prospera CEO Ken Eiden. "Maybe you pay $500 over 10 weeks instead of the usual one or two weeks," he says. That program, he says, keeps customers from falling into a cycle of debt and teaches them how to manage money.

If you need money, and your credit union offers a short-term loan, here are some things you should consider:

•The loan terms. Most payday lenders require borrowers to repay the entire balance, plus fees, when they receive their paycheck. That's a problem, because most borrowers can't repay the entire balance in such a short time, says Lois Kitsch, program director for the National Credit Union Foundation, the charitable arm of the credit union industry. Borrowers often roll the balance into a new payday loan.

Kitsch says consumers should be wary of loans requiring them to repay the balance within a short period. Many credit unions give members 30, 60 or even 90 days to repay loans, she says. Virtually all credit unions that offer short-term loans prohibit rollovers, according to the NCUF.

You should also determine whether your credit union will let you make installment payments if you can't pay the balance by the due date. The NCLC recommends that credit unions give borrowers this option to protect them from rollovers and multiple application fees.

•The loan cost. Some credit unions claim that they charge 0% interest on their short-term loans. However, application and other fees can push the effective APR into the triple digits, according to the NCLC, which has recommended capping the annual interest rate for payday loan alternatives at 36%, including fees.

•Savings features. Some credit unions tie their payday loan alternatives to financial education programs in an effort to help members stay out of debt, Kitsch says. For example, many credit unions that offer payday alternatives require borrowers to deposit 5% to 10% of their payments in a savings account, she says. Their hope is that eventually, you'll have enough money put aside to cover emergencies, eliminating the need for a loan from your credit union, Eddie's EZ Cash or friends who'll return your calls.