Short term loans and similar money loans have been a thorn in the side of banks and credit unions who have sought to gain a foothold as direct lenders in the short term credit market. Payday lenders have addressed the consumer need for quick cash with aplomb, making successful entry into the market perhaps more difficult for traditional financial institutions. As a recent study by UC David Ph. D. Victor Stango entitled “Are Credit Unions Viable Providers of Short-Term Credit” suggests some of the reasons why credit unions (and by extension, even traditional big banks) aren’t mounting any serious completion for payday lenders.
Short term loans just as expensive at credit unions – or even pricier
Stango points out that there simply isn’t a preponderance of evidence proving that short term loans are a viable product for credit unions. To be competitive and hence profitable for a credit union, short term loans must be priced lower than that of payday lenders. In addition, requirements and terms must be attractive to consumers. Having low cost but being riddled with red tape won’t work, and if the price is too high, consumers will look elsewhere.
Fees within fees at credit unions
Of the 7,749 credit unions covered in Stango’s study, only six percent even attempted to offer short term loans to the public. That’s 479 credit unions. Of those, the initial short term loan APR was generally lower than those of most payday lenders surveyed, but not so much that it made a great deal of difference. However, many of the credit unions with lower loan APRs actually had additional loan origination fees that made the cost difference either negligible or tipped it in favor of the payday lenders.
Why did only six percent of credit unions offer short term loans?
The vast majority of credit unions contacted by Stango’s assistant actually refused to explain why they do not offer short term loans. The few who were willing to go on record claimed short term loans were either “too risky” (too many delinquencies), there was “insufficient demand” (which seems unlikely, considering the wide market for short term loans from payday lenders) or “interest rates are too high” (perhaps creating a lack of demand, at least for short term loans with traditional financial organizations).
Federal credit unions are shackled by federal law
Federal credit unions can charge a maximum of 18 percent APR on a loan, which means that for every $100 loans, that would be an interest charge of $1.50 per month. Even if every customer repaid their short term loans on time, that simply isn’t enough to make the product viable for credit unions. Some credit unions have proven able to get around that cap and raise the bar to 36 percent APR, but in almost every case, additional fees are necessary for them to even break even with short term loans, Stango discovered.
In addition to the problems of cost, most credit unions in Stango’s study require that borrowers be members of the credit union for at least 60 to 90 days. Also, if the customer has made any late payments on other loans or filed bankruptcy, they are generally found to be ineligible for short term loans before taking a payday loan. For all of the reasons stated here from Stango’s study, short term loans are simply not a viable product. Payday lenders can provide short term loans and other forms of money loans at somewhat lower cost and with much less administrative hassle.