Can Credit Unions Compete with Payday Lenders?

Even if credit unions offered short-term loans at better interest rates and lending terms than payday lenders—and most don’t—current payday loan customers say they prefer the convenience of payday lenders, according to a new study by Associate Professor Victor Stango.

Growth of payday lenders has led to a policy debate about whether credit unions could offer the same short-term loans with less financial burden on consumers, said Stango. But the National Credit Union Administration reports that only 6 percent of credit unions offer such short-term loans, seeing them as too risky and expensive to maintain. Payday loan customers say they prefer the longer business hours and easier lending requirements of payday lenders, despite the high costs of about 391 percent APR (annual percentage rate). This APR is based on a typical payday lender charge of $15 per $100 borrowed for two weeks.

“It seems unlikely that credit unions can viably serve as providers of short-term credit to the customers currently served by payday lenders,” according to the study, “Some New Evidence on Competition in Payday Lending Markets,” published in the Contemporary Economic Policy (April 2012).

Payday lending has become widespread during the past 20 years, with 24,000 payday outlets operating physical locations in the United States, in addition to more online. By comparison, there are about 16,000 banks and credit unions with about 90,000 branches. Industry reports suggest that between 5 percent and 10 percent of adults in the U.S. have used a payday loan at least once. The data was compiled in 2009.

“Current payday borrowers strongly prefer a higher-priced but less restrictive loan to a lower-priced but more restrictive loan,” Stango said in the study. “Expecting …credit unions to provide borrowers with lower-priced but otherwise similar short-term loans products is unrealistic.”