National Credit Union Report Says Payday Lenders Meet a Need:
Credit Unions Well-Positioned to Offer Payday Loans or Similar Products

The National Association of Community Credit Unions has released a white paper titled, “Credit Union Payday Loan Alternatives.”  The report, written by Jim Jerving, underscores the fact that payday lenders are meeting a consumer need for small-denomination, short-term credit and that payday advance customers are not dominated by any one population segment. Finally, the paper discusses reasons why traditional financial institutions have been reluctant to offer alternative products and presents case studies of those that have.

Members of the payday advance national trade group, the Community Financial Services Association of America (CFSA), welcome the entry of credit unions into the payday advance market. Although most have been unable to rise to the challenge, we believe such competition would be good for the consumers we serve and help mainstream the payday advance product, forcing more lenders to follow high operating standards like those required of CFSA members by the association’s code of Best Practices.

The full report is available at http://www.naccu.coop/white_papers.html

Noted in the report:

Payday lenders fill a consumer need

• “Payday lenders have grown dramatically in the past few years precisely because they are meeting both a need and a service banks and credit unions have failed to provide—convenient, small loans on a short-term basis.” 
• “Payday lenders are fast, friendly and have convenient hours; they are open until 6p.m. and on Saturdays...They have a good business model; they fill a need and provide a service that people want.” said Lois Kitsch, Filene Research director of field projects.
• “Payday loans are one of many costly choices consumers make. Consider the following comparisons, some of which are credit union services:
• $100 payday advance with $15 fee = 391% APR                           
• $100 bounced check with $48 NSF/merchant fees =  1,251% APR
• $100 credit card balance with $26 late fee =  678% APR
• $100 utility bill with $50 late and reconnect fee = 1,304% APR”

Payday advance customers appreciate the service

• “Patrons of payday lenders come from all income levels because they appreciate the process: efficient, quick and free of judgment.”
• “Many Americans are living paycheck to paycheck and lack a cushion for emergencies. ‘You run out of money before you run out of month,’ said Lois Kitsch, Filene Research director of field projects. ‘You don’t want your co-workers or family to know; payday lending is quick and anonymous’.”
• “The immediate need for cash—typically ranging from $100 to $700—is the driving reason for most customers. Often the need is an emergency, such as a car repair or a medical need. Customers need the cash in a hurry and lack the time to wait or undergo a lengthy application and credit check. Or they know that they will fail to pass muster with a credit agency’s report.”
• “The payday loan application is simple and convenient; the lender is customer focused and non-judgmental. The latter is critical since patrons may already feel uncomfortable about needing cash in a hurry and being unprepared financially. Customers say that payday loan stores are clean, comfortable and less intimidating than traditional financial institutions.”

Payday advance customers come from all walks of life and income levels

• “A popular myth is that customers of payday lenders are either low-income or desperate people in need of a quick financial fix. Some of the customers fit that category, but a closer look at the customer profile serves to dispel the stereotype.”
• “Payday loan customers represent every demographic in the American loan market, even those individuals who have an established relationship with a financial institution. Surveys indicate that most payday loan customers tend to be lower-middle to middle-income households.”
  • “A profile of a payday loan customer includes the following characteristics:
  • 68% of customers is under 45 years old, 4% is more than 65 years old
  • 82% has a high school diploma, 52% has some college or a degree
  • 42% owns their homes
  • 66% use advances to cover unexpected expenses or a temporary reduction in income
  • 96% is aware of the finance charge
  • 92% believes that a payday advance is a useful service.”
• “Surveys indicate that most payday loan customers tend to be low-middle to middle-income households. One survey found that half of the customers reported annual household incomes from $25,000 to $50,000. The remaining customers were equally divided between those with incomes over $50,000 and those under $25,000. Payday loan customers tend to be younger than the general population and more likely to have children. More than 40% own their own homes and 57% report owning a credit card.”

Payday advance customers include credit union members and employees

• “Payday lenders have made substantial inroads among members and employees of credit unions…The notion that credit union members and staff are frequent customers is backed up by a survey of 47 credit unions in three states…”  [92 to 100 percent of credit unions surveyed said some of their members are customers and 50 to 75 percent said some of their employees are customers]  
• “Possibly the most important reason for offering payday lending is the fact that many of your members and employees are already patrons of payday lenders. If you don’t offer the product, they will go to a lender who does.”
• “We were denying member requests for small loans of $300 or $400, said Marilyn Davis, VP of lending for the Rockville, Maryland credit union. “They were going to payday lenders and check cashing places for small advances on their paychecks.”    

Traditional financial institutions have been slow to offer payday lending alternatives

• “Traditional financial institutions are loath to make these loans because they are viewed as risky and unprofitable. They can be risky, but they can be profitable if priced correctly.”
• “As not-for-profit financial services providers…[credit unions] offering this type of loan product would seem to be a natural fit. There are barriers to entering this market with a competitive product. But these barriers can be overcome.”
•  “Credit unions already have products that serve short-term cash needs and have the same purpose as payday loans—overdraft protection, lines of credit and courtesy pay. Overdraft protection and a line of credit can be linked to a checking or savings account providing an automatic loan at a minimal cost if it is paid back in a timely manner. Because of credit problems, a sizeable amount of members fail to qualify for these products.”
• “Courtesy pay is not marketed as an alternative to a payday loan, but it serves a similar function when used as credit. Credit unions charge fees ranging from $15 to $35 to cover an overdraft. But when used frequently for small amounts, the annualized percentage rate ‘far exceeds the APRs associated with payday loans. Banks and credit unions may not want to cannibalize this income by offering their customers lower-cost, small dollar credit options.’[Annie E. Casey Foundation, June 2005].”