Even Farther Beyond Payday Loans
Posted by Brent Dixon on January 28th, 2008
The Wall Street Journal published an article titled “Beyond Payday Loans” last week, written cooperatively by political cartoons Bill Clinton and Arnold Schwarzenegger.
In the article, they discuss the $8 billion problem of payday lending.
Here’s a snippet:
Here is one initiative that can unite progressives and conservatives as well as business leaders and community activists: helping the “unbanked” enter the financial mainstream by opening checking and savings accounts, and working collaboratively with financial institutions and community groups to develop and market products that work for this untapped market. This will put money in the pockets of individuals and grow the economy. And it won’t cost taxpayers a dime.
Is it just me, or do Bill and Arnold seem to be channeling the credit union philosophy?
Two credit unions tackling the problem are Wright-Patt CU with their StretchPay loan and Prospera CU, with GoodMoney.
StretchPay is a short-term loan of either $250 or $500 available to Wright-Patt members. The loan comes with a low 18% APR, and is payable over 30 days.
GoodMoney, with branches located in Goodwill stores, offers short term loans at half the rate of the average payday lender, lower-fee check-cashing, bill payment options, wire transferring, and financial education through Goodwill’s Financial Information and Service Center.
Check out this video on GoodMoney from the 2007 Herb Wegner Awards:
Both initiatives stem out of the National Credit Union Foundation’s program REAL Solutions. Full disclosure, REAL Solutions is a client of ours – it’s how I’ve been exposed to some of the awesome things they’re doing for the movement. REAL Solutions is helping credit unions develop products to serve low-income and unbanked consumers.
When we were discussing this, Charlie asked this question:
Are CUs really helping people by making it easier and the rates lower, rather than helping people get into a better financial habit?
I think offering attractive alternatives to predatory lending is step one in the process, but it is kind of a band-aid on the greater question – How do you truly effect people’s financial behavior? Can it be done?
(Also, hat tip to Payment News for highlighting the WSJ article.)
Whether it’s Joe asking his dad for $500 to get him through to next paycheck or Jane standing in line at a payday lender, the need will exist because even changing behavior doesn’t mean emergencies won’t come and wipe out that cushion.
Just like CUs were the original P2P lenders, we were also the original payday lenders [citation needed]. We just weren’t as usurious.
Changing behavior is needed. People just have to want to change that behavior. For those who haven’t progressed that far, we’d be doing them a disservice not to offer alternatives to the sharks.
Hey Brent – your post here showed up on OSCU’s twitter stream – I guess technically not a violation of your TwitterFree Week™. :)
But seriously, thanks for shining light here. This info in the 2nd to last paragraph got my attention – I had no idea this was the case:
“Banks and credit unions can expand their efforts to broaden access to transaction accounts and alternatives to payday loans with terms attractive to the unbanked and underserved. They already have the storefronts to compete for this business: More than 90% of nonbank alternatives are located within one mile of a bank or credit union branch.”
Previous to this info, I had thought that Payday lenders were mostly operating in areas not served by banks and CUs. Clearly I was wrong.
However since the Payday Advance folks want to compete with credit unions and become “Baby Banks” I think credit unions should fight back.
There IS a market for this service (obviously). And it does fall under the category of customer service. There is fee income to be made and a chance to develop stronger relationships with the members and help them develop better financial habits.
I read this post while including PayDay lending into a client’s annual marketing strategy. I had to stop to throw my two cents into the pot :)
Right now, payday loans are a cheaper alternative to bounced checks, and restart fees on utility bills. If a business can provide cash advances to high-risk consumers at lower rates, then those new businesses should try to compete in the market. Price fixing and usury limits do not have the intended effect of forcing legal lenders to lower their fees. Instead, legislating price caps simply forces legal lenders to stop offering loans to certain consumers.
In other words, if legislators cap the fees on short-term loans or bounced check fees, then lenders and banks simply stop offering credit to a large segment of the market. This is not a solution, as persons living paycheck to paycheck will resort to “unregulated” lenders. Prohibition failed in other arenas, driving people to unscrupulous providers, and the same occurs when legislators outlaw payday loans. Typically, when states eliminate payday lending, the consumers turn to unregulated foreign-based Internet payday lenders, as their only alternative to bounced check fees and utility restart fees.
See the following article from the Federal Reserve Board regarding How Households Fare after Payday Credit Bans, for more information: http://www.newyorkfed.org/research/staff_reports/sr309.html . It would be far better to regulate and monitor short term loans, and to find ways to encourage competition, then to simply legislate these consumers into the hands of unregulated offshore Internet lenders.
low 18% apr, did you just say that with a straight face?
Trey -
I absolutely agree. Competitive services like these from credit unions can combat their predatory alternatives and offer an entry point into other opportunities for underbanked. Something as simple as a checking account as an alternative to check cashing is huge.
Behavioral change, for the most part, has to operate in some natural progress.
Morris -
Isn’t that stat crazy? Also, there are more payday lenders than McDonalds (I learned that from Doug True).
Tony -
If you’re incorporating that into a clients strategy, another credit union worth talking to is The Lower East Side People’s FCU in New York. They actually partnered with payday lenders in the neighborhood, bringing their rates down and turning each participating payday lending shop into a credit union branch. Very cool stuff.
Anonymous -
That’s an interesting perspective, I hadn’t really thought about the implications of over regulating to the point of shutdown…forcing borrowers into even shadier situations. You’re right, competition is key – payday lending will stop making sense to the market when their are cheaper alternatives. It’s why credit unions, like Wright-Patt and Prospera, continuing to develop products and strategies around this is so important.
Damon -
When the average APR on a payday loan is something like 400% (some even getting into the 900s!), 18% is incredibly low.
Brent-
Great posting,
You offer a great comment/question – “I think offering attractive alternatives to predatory lending is step one in the process, but it is kind of a band-aid on the greater question – How do you truly effect people’s financial behavior? Can it be done?”
I sit near our Contact Center and over hear many of our members applying for our Payday Lending Alternative “Q-Cash” loans. (www.q-cash.com) I was curious to see if it indeed was a ‘better alternative’ than the predatory lenders’ fees. Here’s what I found out:
Payday lender’s fee: $15 per $100 borrowed. Q-Cash fee: $10 per $100 borrowed. PL’s due dates: 30 days to pay back entire sum. QC due dates: 45 days with availabilty to pay in 2 payments. PL’s financial counseling: ‘keep comin back for more’. QC counseling: advise free financial counseling with BALANCE for repeat borrowers.
Here are some interesting numbers: Avg age range w/highest number of Q-Cash loans – 40-49. 49% of Q-Cash Borrowers are from our “Highly Profitable” members category. The largest segment using Q-Cash is our ‘middle market’ at 31%.
Clearly the perception of only ‘low income’ individuals using short term lending is incorrect.
So your question of are we REALLY helping our members? Yes, in the short-term, but unless they get off the cycle of short-term lending, it’s still doesn’t solve the problem. I think education and counseling are easy to say, but following thru with it is the hard part that we need to commit to.
Strengthening our relationship with those members is vital by doing everything we can to help them with their personal finances without the need for short term payday loans.
Sorry, I’m a little late, but first off I wanted to say hello to those of you that know me. I was gone for a while (getting married, taking care of kids, finishing a bachelors degree and financial counseling certification, etc.), but I’M BACK! At least part time . . . a couple days a week at the credit union (jgorris@llcu.org), a couple at home (turtle9241@aol.com), so feel free to e-mail me either place. :)
Since I recently finished my financial counseling certification and have been bugging the snot out of my credit union to let me start a financial counseling program, obviously this post caught my attention.
I want to highly applaud the credit unions who have created an alternative to payday lenders and cash advance stores. Like Trey mentioned, 18% is VERY low compared to the interest rates of payday lenders that range from 300% – 1500% (yes, I’ve seen it and if I was at the office, I could get the information for you on where that came from – if you’d like it, please e-mail me). And if you average out the interest rate of most NSF fees, since most financial institutions give you 30 days or less to bring your account positive, that number climbs pretty high too. 18% for a high risk member is pretty good.
I also give props to those that are offering some sort of financial counseling program, such as BALANCE, to their members along with the payday alternatives. As stated, the loan is a short-term “band-aid” to the problem. However, if someone sits down with them, and help them get the rest of their finances in line, there is most likely somewhere that they can be saving money so that they don’t have to continually rely on the payday loans. I could spend the next 2 hours on examples of this, so if you want some, please e-mail me. But keep in mind, that for people relying on payday lenders, who don’t qualify for loans through credit unions, they feel it is their only option (and sometimes it is), so simply explaining to them how much interest they’re spending by going to these places, and how bad they are, without offering REAL solutions means nothing to them.
The point is, payday lending does have its place. There are reasons why people go to these places. I have a very good friend who is district manager for a cash advance company, and she could tell you story after story of people who she has truly helped because noplace else is willing to take the risk. It is time for credit unions to step up, create programs for these people, AND offer financial counseling. Because, in all reality, as someone stated before, it is not always low income people. Many times the people we are talking about are people who have decent income, but poor budgeting and spending habits.
Oh, and one last thing real quick, just as an example for those who may still think that payday lenders only exist where other financial institutions do not, we have at least 5 within a mile radius of our credit union, 3 of which are within 6 blocks on the same street as our office.
Ok, sorry this is so long, but you presented a topic that I am very passionate about.