Are credit unions really able to offer short term, low dollar value loans meant to compete with payday lenders?
A new study from a researcher at the University of California Davis suggests that only 6% of credit unions in the U.S. offer short term, low dollar amount loans meant to compete with payday lenders.
Victor Stango, an economic researcher and graduate student at the school's Graduate School of Management wrote in "Are Credit Unions Viable Providers of Short-term Credit," that many credit unions doubt they can offer these loans profitably.
"We also present survey evidence in which credit unions themselves report the greatest practical obstacles to offering payday loans," Stango wrote. "Responses are generally variants on a single theme: 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."
Stango also reported that, in many cases, credit union payday loan alternatives can be as expensive or even slightly more expensive than the loans payday lenders make.
"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," Stango wrote. "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."