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Credit Union and Bank Payday Loan Comparison

rolls of dollar bills
The payday loan industry is growing.

In fact, it is growing so much that even banks and credit unions are getting in on the action by offering payday loan alternatives.

While these newer financing products go by various different names, they are all trying to replace the same convenience and features of the traditional payday loan, chief among which is offering short-term financing to people who do not have good credit.

Perhaps most surprising in this development is the involvement of credit unions. During the recent recession, credit unions were hailed as not just alternatives to “greedy” mega-banks, but also as heroes offering consumer-friendly products. The entrance of some credit unions into the payday loan market is now a bit of a role reversal, at least in the eyes of anti-payday loan voices.

According to the Community Financial Services Association of America (CFSA), a leading trade association for the payday loan industry, the typical fee charged per two-week payday loan is $15 for every $100 borrowed. Expressed as an annual percentage, this means that a $200 two-week payday loan has an APR of 391 percent — for a total cost of $230.

In order to see if the payday loan alternatives at banks and credit unions are any more affordable for customers, loans.org compared them to a $200 payday loan borrowed once or rolled over to match the same maximum loan lifetime of each alternative.

Lender

Requirements

Interest Rate and Fees

Max Term

APR on $200 for Max Term

 

Total Amount of Interest and Fees Due After Maximum Term

 

APR of Avg. Payday Loan for Equal Term

Alternative Cheaper than Payday Loan for Equal Term?

Veridian Credit Union "Payday Alternative Loan"

Must be Credit Union Member

$20 application fee, 19% with Automatic Payment, 21% without Automatic Payment

180 days

58% or 62%

$58 or $62

395%

Yes

America's Credit Union "Credit Union Better Choice"

Must be Credit Union Member

$20 application fee, 18% APR

90 days

58.54%

$28.87

425%

Yes

Louisiana Federal Credit Union "PayDay Loan"

Must be Credit Union Member

$20 application fee, 15% APR

37 days

113.64%

$23.04

443%

Yes

Fifth Third Bank "Early Access"

Must be Bank Member

$1 for every $10

35 days

104%

$20

469%

Yes

Regions Bank "Ready Advance"

Must be Bank Member

$1 for every $10

35 days

104%

$20

469%

Yes

US Bank "Checking Account Advance"

Must be Bank Member

$2 for every $20

35 days

104%

$20

469%

Yes

Wells Fargo "Direct Deposit Advance"

Must be Bank Member

$1.50 for every $20

35 days

78%

$15

469%

Yes

State Employee's Credit Union "Salary Advance Loan"

Must be Credit Union Member

12% APR, plus 5% deposit of the amount borrowed

next pay date (14 days on average)

11.37%

$0.92

391%

Yes

As the data shows, all of the banks and credit unions offer alternatives that are actually cheaper than a traditional payday loan. However, there are some problems exclusive to the alternatives offered by the credit unions. 

The requirements of the analyzed credit unions reveal that these institutions are charging people money merely to apply for a payday loan alternative. This means that applicants, if rejected, will lose money by simply applying for a payday loan alternative.

If someone is applying for a payday loan alternative, let alone a payday loan, they are not likely to be in a position where they can afford to lose money. The whole point of getting a payday loan is to satisfy a need for quick cash, which alludes to a borrower being in a dire financial situation — one in which a borrower cannot afford to have further jeopardized based upon the whims of a credit union underwriter.

Unlike banks and credit unions though, many payday loan companies offer these quick and unbiased loans as their sole service. Consequently, these companies have streamlined their product and service to the point where they afford to withhold any application fee — making the application process a risk-free endeavor.

There is one other massive and inconvenient problem inherent in credit union and bank payday loans.

The Burden and Hassle of Membership

One of the best and most desired features of payday loans is their convenience. To apply for one, all a borrower need do is walk into a payday loan store, call a payday loan company, or visit an online lending website.

Traditional payday loan lenders do not require membership, and all customers, including first-time customers, can seek approval for fast cash in a matter of minutes.

This convenience is nonexistent for most credit union and bank payday loan alternatives.

As the above chart shows, all of the profiled banks and credit unions require payday loan alternative applicants to be members. This is far from a minor inconvenience.

What if a borrower gets in a car accident and needs cash for car repairs? What if a borrower needs cash for rent and groceries?

All that is required to borrow a payday loan from a traditional payday loan company is an existing checking or savings account and proof of an income source.

Thriving on Payday Loan Competition

While the traditional payday loan industry may be suspicious and displeased that banks and credit unions are now joining in on the payday loan market, consumers and borrowers should be relieved.

Nothing helps borrowers and consumers more than competition and while the traditional payday loan industry might not like the added competition, banks and credit unions will prompt innovation and a battle to offer a better product.

In America at least, consumers already enjoy the benefits of competitive markets.

There isn’t just one gas station company offering sky high prices due to a monopoly. Rather, several different gas stations tend to be found in close proximity to each other with competitive prices. People end up paying the best price since each gas station tries to offer a better price to their customers.

There isn’t just one smartphone company that offers a single expensive smartphone. Rather, several companies are in the market and each year they compete to offer faster phones with bigger screens and better quality features all at as cheap of prices as possible.

However, even though competition can trigger growth and innovation, that doesn’t mean that every competitor is going to be successful or be the best option for consumers.

As Amy Cantu, Communications Director at the CFSA, explains, “The best available evidence supports a view that credit unions cannot viably serve as providers of short-term credit to the customers currently served by non-bank payday lenders.”

And regarding banks, she has seen little evidence that shows they could be more competitive than credit unions in competing with payday lenders.

“Borrowers needing a small sum for a short period of time may find the standard payday loan from a non-bank lender to be quite competitive in terms of total borrowing cost,” she said.

As the entrenched traditional payday loan industry battles with banks and credit unions for market share, all sides will try to out-compete the others by offering better rates and better terms for consumers.

America can look forward to the time that credit union, bank, and payday loan company cash advances all look nearly indistinguishable and meet in the middle between affordability and convenience. At the moment though, the payday loan alternatives offered by banks and credit unions do not help people in need of quick cash.

 

Sources:

https://www.wellsfargo.com/checking/direct-deposit-advance/fees

https://www.usbank.com/checking/caa/

http://cfsaa.com/aboutthepaydayindustry/myth-vs-reality.aspx

http://www.regions.com/personal_banking/ready_advance_tc.rf

https://www.53.com/doc/pe/pe-eax-faq.pdf

http://www.veridiancu.org/loans/pal.asp

http://www.pacreditunions.com/betterchoice.html

http://www.louisianafcu.org/loans/payday-loans

https://www.ncsecu.org/PersonalLoans/SalaryAdvance.html