What is a payday loan?
A payday loan is a small (average size is $350) short term cash loan with an average term of usually 14 days.
These loans are available at a variety of alternative financial service providers and generally have a fee per hundred borrowed resulting in triple digit interest rates. On the due date (typically the borrowers next payday), lenders require a balloon payment of the entire principal plus interest.
Many consumers cannot afford to repay the entire debt and are forced to roll the loan over with new fees. This balloon payment is what causes the cycle of debt.
Who uses payday loans?Payday loans are apt to be used by consumers who:
- Are banked – 100% have a bank account
- May be homeowners (42%)
- Are often under the age of 45 (median age is 32)
- Are women with children at home (62%)
- Are of low to moderate income – 50% have incomes from $25,000 to $50,000
Why should credit unions care?
An estimated 15 to 20 % of credit union members are using or have used a payday loan product sometime within the past five years.
Members using this product are often caught in a cycle of debt making it difficult to honor obligations – such as credit union loans – or to save for the future.
Members turn to alternative providers because they provide fast and easy loan approval with few questions asked or because they do not want their credit union to know they are having financial difficulties.
What can credit unions do?
Credit unions may consider offering an affordable payday loan alternative that is sustainable for the credit union. There are hundreds of credit unions providing their member’s affordable solutions. To learn more about what your credit union can do – download the REAL Solutions Payday Loan Alternative Toolkit or browse the Who’s Doing It tab above for specific case studies.
Stretch Plan » View details
The credit union began offering the Stretch Plan product in 1999 because members were using payday lenders. “Our branch managers noticed a high number of check cashers and payday lenders coming into our branches to cash our member’s checks,” says Shannon Cian (title). “We wanted to provide a more affordable product and bring people into the traditional banking sector. Some of our members have stopped using payday lenders, but we are realistic enough to know that some continue to use them.”
Freedom Loan - St. Louis Community » View details
The Freedom Loan is designed to help members break free from traditional payday lenders who take advantage of their immediate need and should be used for unforeseen or emergency expenses only. Other types of loans are available at the credit union which are less expensive.
Smart Solution Loan - Air Academy » View details
Air Academy Federal Credit Union (AAFCU) decided to offer a payday loan alternative after realizing military personnel were the primary targets of payday lenders. According to a 2005 study by the Center for Responsible Lending, 20% of active-duty military members had taken out a payday loan. In 2007, Congress passed legislation making it illegal to charge service members more than 36% interest and as penalties increased for predatory lending practices many payday lenders stopped lending to military individuals. Air Academy realized it needed to step in and fill the short-term loan void by offering an alternative solution with reasonable rates and fees. Its Smart Solution Loan was the result. Within two months of launching the product, the credit union had 28 loans. As of June 30, 2013, it had made 1,063 loans totaling $406,182.
How to establish a Payday Lending Alternative
- Alternative Payday Loan Toolkit
- Alternative Payday Loan Worksheet / Spreadsheet
- Alternative Payday Loan Product Worksheet
- Payday Lending the CU Way – NCUF & CUNA Lending Council White Paper on Payday Lending
Payday Lending Laws and Regulations
- NCUA Guidance for CUs re: Short-term, Small Amount Loans
- New NCUA Ruling on PaydayLoans – September 2010
- State-by-State Analysis of Payday Loan Laws
- Pa. Bill To Legalize Short-Term Loan Alternatives
White Papers and Reports
- Profiting from Poverty: How Payday Lenders Strip Wealth from the Working-Poor for Record Profits – National People’s Action Report
- Cooperative Credit:How Community Development Credit Unions are Meeting the Need for Affordable, Short-Term Credit – Woodstock Institute White Paper
- Payday Holiday: How Households Fare after Payday Credit Bans – Federal Reserve Bank of New York Paper