Understanding the Alternative Payday Lending Opportunity

Examining the basics of payday lending highlights the opportunity credit unions have to serve a clear market need with a responsible alternative.


Payday lending is contentious. Some view it as legal loan sharking, while others see it as a viable financial alternative meeting a clear market need. To properly understand the issues, it is first necessary to understand the basics:

What is payday lending?  

A payday loan is generally a small, unsecured loan ($100-$500) with a short payment period (usually less than two weeks) and a fixed-dollar fee serving as the finance charge. Payday loans can be obtained without a credit check in less than 20 minutes through a variety of channels including in person, on the phone, or over the Internet.

Payday lending is currently a $40 billion a year industry and payday lending stores are among the fastest growing financial services in America. Just ten years ago there were a few hundred payday stores. Now there are more than 22,000, more than twice the number of credit union branches and even exceeding the national number of McDonald’s locations.

How does payday lending work?

Typically the borrower secures the loan with a post-dated check for the amount of the loan plus the fee. For example, if the customer borrows $300 and the fee is $15 per $100, the customer would write a check for $345. The lender defers presentment of the check until the agreed upon date, typically the customer’s next payday. If the borrower cannot repay the loan on the agreed upon date, the loan can be rolled over for additional fees. This practice of rolling over the debt can ultimately lead to a cycle of debt. This is one of the primary issues that opponents of payday lending will argue.

Who is a payday loan customer?

Borrowers are generally working individuals faced with an unexpected financial expense or in need of cash to cover everyday necessities. They often lack access to traditional lines of unsecured credit or cannot wait for credit checks or processing.

These payday users are not just the underserved or unbanked, however. In fact, many credit union members and even credit union employees receive payday loans. According to Mister Money, a payday franchise with over 65 locations, the average payday loan customer is 34 years old with an annual salary of between $30,000 and $45,000. Thirty percent of payday borrowers have mortgages.

Why does payday lending present an opportunity for credit unions?

Payday lending itself is neither good nor bad. Rather, the controversy is primarily in how the service is structured and delivered. There is an opportunity for credit unions to provide a service similar to payday lending, but in a more member-centric fashion.

Lower rates and longer repayment periods are just one way credit unions can provide the borrowers with helpful credit rather than create further debt. Alternative payday lending also creates an opportunity for credit unions to educate borrowers of other lending options and offer financial education programs to help break the cycle of debt and borrowing.




Nov. 14, 2005


  • I have been in the credit union industry for over thirty years and I still wonder who established our core mission as serving the underserved. It was thrust upon us by a former regulator and seems to have stuck. If not tactfully challenged it will eventually work against our well being. R. Hatch CMT Federal Credit Union
  • I think you are unaware of how active credit unions are in the pay day lending arena. SAFE Credit Union has an extensive program of making small unsecured loans to thousands of members. Our program is much more convenient than the typical pay day lending program. Our members write checks for which they have no funds and we cover them up to $1,000 for $18. The member repays the amount when their next deposit occurs to their account. In most instances this occurs when their next payroll posts. We call our program Courtesy Checking and it is very common throughout the credit union industry. It is better than payday lending for the following reasons; 1. It is cheaper. The typical payday lender charges about $15 per $100 advanced. 2. Our members don't have to go to any office to get the funds they need. Our members are only advancing funds when they need the money. We help our members avoid the charge by posting all credits first and then debits. We post the smallest items first and then the largest to limit how many checks will not clear. We cover advances under $20 without charging any fee. We transfer shares or line of credit funds for a $3 charge before we use courtesy check services. We correspond with members who use the program to educate them about lower cost alternatives. Henry Wirz
  • Good basic information.
  • From the author: Thank you for your comments. To help clarify the discussion I thought it would be beneficial to go back to the original 1934 FCU Act: ‘‘An Act to establish a Federal Credit Union System...to make more available to people of small means credit for provident purposes through a national system of cooperative credit.’’
  • The core mission was NOT forced on credit unions. The founders of the CU movement created CUs for that purpose. Regulation came much later. D Skinner (PhD in Finance), Ashland Community FCU.
  • It is a very informative article.
  • This was very imformative and good to know
  • very good explanation of payday lenders and opportunities for CU's
  • Great overview
  • Very Helpful - Thanks