SOURCE: Professor Victor O. Stango

May 10, 2010 13:54 ET

Credit Union Alternatives Cost the Same as Payday Loans

Few Credit Unions Seek to Compete in Small-Loan Market; Borrowers Prefer Traditional Payday Lenders

DAVIS, CA--(Marketwire - May 10, 2010) -  A groundbreaking study, "Are Credit Unions Viable Providers of Short-term Credit?" by Prof. Victor O. Stango concludes that credit unions cannot offer payday loan alternatives any more cheaply than payday loan companies. According to Prof. Stango, who teaches at the Graduate School of Management at the University of California: Davis, few credit unions are able to compete in this market. Moreover, relative to the few credit unions that do provide short-term loans, borrowers prefer traditional payday lenders to fill short-term credit needs.

Prof. Stango compared credit union short-term loans to payday loans in terms of both fees and convenience. His research -- compiled from data from credit unions, the National Credit Union Administration and payday loan customer surveys -- found that credit union rates are generally equal to or higher than those of traditional payday lenders, particularly on a risk-adjusted basis, and that the loans are less convenient for borrowers.

Nor, Prof. Stango noted, do credit unions compete effectively with payday lenders on non-price terms, such as hours of operation or protection against damage to a borrower's credit score from default.

Specifically, the study says that:

Few credit unions offer payday loans:
"Fewer than six percent of credit unions currently offer payday loans... Most credit unions do not offer payday loans because they see little chance to break even on a low-priced payday advance product -- either because the rates/fees they would charge are too low, or because payday loans are too risky."

Credit union fees on payday loan alternatives are actually similar to payday loan fees:
"Despite much lower nominal loan APRs, credit union payday loans often have total fee/interest charges that are quite close to (or even higher than) standard payday loan fees. Further, credit union payday loans have tighter credit requirements, which generate much lower default rates. Together, the combination of only slightly lower total charges and significantly lower default rates raises the possibility that risk-adjusted prices on credit union payday loans are no lower than those on standard payday loans."

Consumers prefer the convenience of payday loans over credit union alternatives:
"Credit unions typically have locations and business hours that consumers find less convenient than those of commercial payday lenders.

"Application times are longer at credit unions. And, default on a credit union payday loan may harm one's credit score, while default on a standard payday loan does not harm one's credit score."

A typical payday loan costs $15 per $100 borrowed with a loan period of two weeks. In comparison, Prof. Stango found the following terms on credit union loans:

  Fee Term "Savings" held back
Better Choice (80+ Cus) $35/$70 per year 90 days 5%
       
Stretch Pay (100+ Cus) $25 per loan 30 days 10%
       
ADVANCPay $60/$70 per loan 2 weeks none
       
GoodMoney $9.90 per $100 2 weeks none
       
Rivermark $15 per loan 30 days none
       
1st Financial FCU $50 per loan 30 days none
       
Four Corners $20 120 days none

The full study is available at http://faculty.gsm.ucdavis.edu/~vstango/Credit%20union%20monograph.pdf.

Contact Information

  • PR Contact:
    Victor O. Stango
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