Payday Loans Preferred Over Credit Union Loans

While opponents of the payday lending industry have pleaded with traditional lenders and lawmakers to offer alternative forms of short-term financing, borrowers would still prefer to use the services of payday lenders.

The reason? Convenience, according to a recent study on payday loans by UC Davis.

Payday lending has become a prolific industry that provides borrowers with short-term loans which effectively grant borrowers cash advances on their next paycheck. When a borrower receives his or her next paycheck, they are expected to repay their lender—hence the name, payday loans.

The interest and fees on this type of financing usually rests around $15 per $100 borrowed. That annual percentage rate, or APR, equates to an astounding 391 percent.

This high, often deemed usurious, rate is what has prompted consumer advocates to urge lawmakers and traditional lending sources to create a short-term financing alternative for the public.

But some say that’s not possible.

“Expecting… credit unions to provide borrowers with lower-priced but otherwise similar short-term loan products is unrealistic,” said Victor Stango, an associate professor at UC Davis, and the author of the payday loan study.

The short-term financing industry is risky since those in need of these products often cannot obtain financing from traditional sources due to their poor credit scores. As a result, payday loans are usually originated without the need for a credit check. When traditional lenders begin waving credit checks, their transactions become far too risky and expensive to maintain.

The risk and expense of offering payday loans has led to only 6 percent of credit unions even offering short-term loans, according to the study.

What’s more is borrowers say that they will likely use payday loan lenders over credit unions offering the same service at better terms simply due to payday lenders’ ease-of-access.

Long business hours and less-stringent lending standards are what draw most borrowers to these lenders’ doors.

“Current payday borrowers strongly prefer a higher-priced but less restrictive loan to a lower-priced but more restrictive loan,” said Stango.

Additionally, the countless payday lenders that offer their services online allow borrowers to obtain money from the comfort of their very own homes.

This study reignites the debate of whether or not lenders owe the public protections even though the public is willingly demanding their product in its current form.