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PCUA Calif. study errs on payday loan program
HARRISBURG, Pa. (5/14/10)--The Pennsylvania Credit Union Association (PCUA) says the conclusions of a California study of credit unions as alternatives to payday loans are erroneous. The study, “Are credit Unions Viable Providers of Short-term Credit?” by Victor Stango of the Graduate School of Management at the University of California, Davis, focuses on credit unions as potential competitors to payday lenders. It maintains that national data on credit unions’ payday loan offerings indicate “that very few credit unions currently offer a payday loan alternative. Industry reports suggest that those credit unions offering such loans seem unwilling or unable to undercut substantially the prevailing prices set by payday lenders.” The study said that the short-term loans offered by credit unions “generally carry greater restrictions on approval and repayment, meaning that risk-adjusted prices for credit union payday loans may not be lower at all.” Stango said that current prices and features for credit union payday loans are not competitive; that most current payday borrowers prefer higher-priced but less restrictive standard payday loans to lower-priced but more restrictive alternatives offered by credit unions. “The combined demand- and supply-side evidence suggests that credit unions are probably not viable providers of short-term credit for consumers who currently use payday loans,” the study concluded. In its rebuttal statement to the study, PCUA said: “First and foremost, credit union programs are designed to be an alternative to payday lenders. As alternatives, these credit union programs offer longer repayment terms and lower rates and fees. Further, the researcher, Professor Victor Stango, inaccurately cites cost attributes of Pennsylvania’s Credit Union Better Choice loan program.” The Credit Union Better Choice loan program offers consumers a loan up to $500 for up to 90 days at an 18% interest rate with a one time $25 application fee, PCUA added. The consumer then makes payments on the loan in weekly, biweekly, or monthly installments instead of a one-time payment at the end of a two-week period, as is the practice of payday loans. In Pennsylvania, payday lenders charge $15 or more per $100 borrowed every 14 days. Using those figures, the total cost for a $500 loan over 90 days is $450. By comparison, a 90-day Credit Union Better Choice loan at the maximum rate and application fee costs that same borrower only $40.09, PCUA said. “[The program] is not simply designed to be a less expensive payday loan option,” PCUA added. “Rather it is intended to break the cycle of debt that typically traps payday borrowers by transitioning them from wealth-stripping products like payday loans to wealth-building products typically offered by mainstream financial institutions. “In addition to providing a lower cost alternative to payday loans, the Credit Union Better Choice program has a required savings component and requires credit unions to provide financial education/coaching to Credit Union Better Choice borrowers,” PCUA said. PCUA concluded: “Since the inception of the Credit Union Better Choice loan program in October 2006, Pennsylvania credit unions have issued more than 28,000 loans totaling $13.4 million, which saved borrowers more than $10 million over traditional payday lenders and also put more than $1.3 million into borrowers’ savings accounts. Quite frankly, these statistics speak for themselves and directly refute the U.C. Davis study.” To read the PCUA statement, use the link.
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