Are Credit Unions Viable Providers of Short-term Credit?

That is the question posed by Victor Stango at University of California, Davis Graduate School of Management. It is a particularly relevant policy question given that some credit unions and their trade associations have been championing legislation at the state level to shut down traditional payday lenders.

The following discussion highlights some of the key findings of the study.

The study found that according to NCUA data "fewer than six percent of credit unions currently offer payday loans, and credit unions probably comprise less than two percent of the national payday loan market."

Stango writes that "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."

"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."

"Further evidence on non-price terms reveals that tighter credit requirements are not the only negative feature of the credit union payday loan. 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."

Citing results from a survey of payday borrowers, the study found that very few payday borrowers preferred the credit union approach to payday loans. Borrowers dissatisfaction with the credit union payday alternative arose from shorter hours of operation, a desire to keep separate payday borrowings from other banking activities, and a default on a credit union payday loan could harm one's credit score. However, these survey findings are based on a small sample of 40 payday borrowers.

Based on these findings, Stango concludes that it is unlikely that credit unions could viably serve this market.