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.