Ready to meet the neighbors? According to the Center for Responsible Lending, nearly half of U.S. states have two or more payday lenders in operation for every 10,000 households.
That kind of presence doesn’t just speak to an immediate need for short-term financing among consumers. It also means payday lenders are an extremely convenient option for emergency financing, to the point that even members of reputable financial institutions stray to the service.
But there are other options.
According to Callahan & Associates’ Peer- to-Peer software, 560 credit unions offer alternatives to payday loans as of 3Q11, up from 517 the year before. These loan solutions frequently include better rates and terms for repayment.
Offering these loans as an individual institution is one thing. But by using the co-operative network to take these options community-wide or even statewide, credit unions can deal a serious blow to predatory competition.
The Nebraska Credit Union League recently partnered with six credit unions in the Lincoln, NE, area, including University of Nebraska Federal Credit Union ($75M, Lincoln, NE), to launch a multi-institution alternative to payday loans called QuickCash.
“In the past, we relied on overdraw protection privilege and traditional loans with no minimum terms to assist with members’ emergency needs,” says Monte Dickson, vice president of member services for University of Nebraska FCU. But as the lure of payday lenders grew, so did the need for a direct, convenient alternative.
“We knew members used payday loans, but this is the first time we’ve ever had a specific product to try and reach those members,” he says.
Grabbing the attention of fringe financial borrowers means meeting them half-way ─ with the ease of use they are used to, and a co-operative difference they’ll appreciate.
At 18% APR and with a $20 application fee, the $500 QuickCash loan does not require a pulling a credit report, but the borrower must have been a member for more than 30 days, have proof of income, and have direct deposit to qualify.
Adequate time is a distinguishing factor for the product, giving the members the best shot at fulfilling their obligation while avoiding the debt trap that payday lenders produce. QuickCash’s loan term is two months, with a 10-day grace period for overdue loans. Members also cannot take out another loan within 30 days of paying off a previous loan, which discourages chronic use, Dickson says.
Borrowers also get access to a credit report analysis, financial counseling, budgeting software, and several other resources that help them understand how they got in their current position and how to stay out of it in the future, says Dickson.
In less than two months, the participating credit unions have helped over 140 individuals who otherwise may have turned to payday lenders in their hour of need.
And don’t assume payday loans are just an issue for those with limited income, Dickson says.
“We have a range of different occupations, but in the first four QuickCash loans we did, half were for members with income over $100,000 a year,” he says. “Some are still living paycheck-to-paycheck, despite what you might think.”
4 Ways to Differentiate Your Payday Loan Alternative
Be an educator. Advise the right and wrong contexts for taking out a payday loan and move members to more traditional products when they qualify for them.
Be low-fee to no fee, and explain how fees correlate to the larger picture. Painting a clearer picture of APR will help consumers think about their commitment and their ability to follow through on these loans.
Be long-term.Payday lenders trap people in a cycle of borrowing through short terms, so make sure your options provide extended payment terms.
Be an emancipator. Provide free counseling, mandatory savings programs, or other incentives to address the base financial deficits that cause a dependence on these short-terms loans.
Source: National Consumer Law Center.