PCUA Statement on U.C. Davis, Payday Lending Study

5/12/2010 In response to the research study issued from the University of California, Davis, concluding that credit union payday loan alternatives may not be better than traditional payday loans, the Pennsylvania Credit Union Association states that 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. 

To clarify, the Credit Union Better Choice loan program offers consumers a loan up to $500 for up to 90 days at an 18 percent interest rate with a one time $25 application fee.  The consumer then makes payments on the loan in weekly, biweekly, or monthly installments instead of a one-time payment due 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. 

While the cost savings in and of themselves are substantial for Pennsylvania consumers, the Credit Union Better Choice program is not simply designed to be a less expensive payday loan option.  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.  Regarding the savings component, our to Credit Union Better Choice borrowers who pay off their $500 Credit Union Better Choice loan within 90 days receive $52.25 in a savings account, which for many is the first savings account they have ever had. 

Through the one-on-one financial education/coaching, Credit Union Better Choice borrowers are encouraged to continue saving and to take other proactive steps so that they may not need a short-term small dollar loan for their next emergency.  In addition, the credit union works with the borrower to see what other mainstream financial product/services they could use to save them additional fees.

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 that asserts that credit unions can not provide a viable alternative to traditional payday lenders.

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Credit unions are financial cooperatives that provide affordable financial services to help their owner/members.  The Harrisburg-based Pennsylvania Credit Union Association is a trade association that provides legislative, promotional, educational and operational support for nearly 500 credit unions in Pennsylvania.  These credit unions have assets in excess of $31 billion and serve more than 3.5 million members.  For additional information about credit unions or to find a credit union near you, visit www.iBelong.org