Some credit union loans are not a good deal

— -- Short-term loans offered by some credit unions as alternatives to high-cost payday loans are as risky and deceptive as those they're supposed to replace, some consumer groups say.

Payday loans allow cash-strapped consumers to take out small loans against their next paycheck. The loans often carry annual interest rates of 400% or more. Because they typically have to be repaid in two weeks or less, many borrowers roll the balance into a new loan, which mires them deeper in debt.

In recent years, hundreds of credit unions have introduced short-term loans for members who face a temporary cash crunch. But some of the loans "are only marginally cheaper than traditional payday loans," says Lauren Saunders, an attorney with the National Consumer Law Center.

The National Credit Union Administration, which regulates federal credit unions, last week issued guidance to its members, alerting them to the "risks, compliance issues and responsibilities" associated with a short-term loan program.

The agency issued the letter in response to the rapid growth of these programs in recent months, says John McKechnie, spokesman for the agency.

Federally chartered credit unions are prohibited by law from charging more than 18% on loans, but some charge excessive fees that drive up the effective rate, Saunders says.

For example, Nevada Federal Credit Union says it offers a 0% annual percentage rate. Brad Beal, president of the credit union, says it charges an application fee of $70 for a 14-day loan of up to $700, or $60 for members with direct deposit. That's half the fee charged by the average payday lender, he says. But the National Consumer Law Center points out that a $70 application fee for a $400, 14-day loan is the equivalent of a 455% APR.

Saunders' consumer group has recommended capping the annual interest rate for payday loan alternatives at 36%, including fees. But Beal says that works out to less than $10 per loan and wouldn't cover his credit union's costs.