Texas credit unions are taking on payday lenders with the development of what they say will be an alternative loan.
About 50 credit unions – including nine in North Texas – are developing the yet-to-be-named product, which they hope to make available in the third quarter.
“Our ultimate goal is to empower low-wealth consumers and move them into economic stability,” said Mike Delker, vice president of credit union relations for the Texas Credit Union League. “We’re not talking about a hand-out. Families caught up in the predatory lending trap don’t need our charity. They need solutions.”
Giving more options to consumers who seek payday loans is good because they can ill afford the high cost of such loans.
Payday loans are big business in Texas, to the tune of nearly $3 billion a year, according to Don E. Baylor Jr., senior policy analyst at the Center for Public Policy Priorities in Austin.
A payday loan, also known as a cash advance, is a small short-term, high-interest loan that’s intended to bridge a borrower’s cash flow gap between pay periods.
The majority of customers earn between $25,000 and $50,000 a year, according to the Community Financial Services Association of America, which represents payday loan companies.
To obtain a loan, a borrower gives a payday lender a postdated personal check or an authorization for automatic withdrawal from the borrower’s bank account. In return, the borrower receives the loan amount, minus the lender’s fees, which can be substantial. For example, with a $300 payday loan, a borrower might pay $45 in fees and get $255 in cash.
The lender holds the personal check or electronic debit authorization until the borrower’s next payday. At that time, the loan is due in full.
Consumer advocates have long criticized payday loans for their astronomical cost.
For example, for a 10-day, $400 payday loan, Texans could expect to pay about $100 in interest and fees, equating to a 925 percent annual percentage rate, Baylor said.
The average payday borrower pays $800 to borrow $325, and 99 percent of payday loans go to repeat borrowers, the credit union league said.
The payday lending industry says its products are short-term loans – typically for two weeks – and shouldn’t be used as a long-term financial solution.
The industry says the triple-figure APR is misleading because payday loans aren’t annual loans.
It also challenges the argument that payday loans trap borrowers in an endless cycle of debt, saying that payment plans are available at no additional fees and that more than 90 percent of payday loans are repaid when due.
In Texas, most payday lenders require customers to reapply for a new loan instead of simply extending or “rolling over” the original loan, said Rob Norcross, spokesman for the Consumer Service Alliance of Texas, which represents the state’s payday lenders.
He said members of his group limit the number of refinances as part of their underwriting criteria. “Some use three, others four, as general criteria,” Norcross said.
Still, consumers who see no other alternative to a payday loan need more options.
About 20 percent of credit union members use payday loans, said Natasha Melugin, league representative at the Texas Credit Union League.
“We have been advocating for the advent of alternatives, so we’re working in coalition with several other groups trying to promote alternative products,” Baylor said.
Features of the alternative loan include:
• An annual interest rate capped at 18 percent.
• A savings feature. For example, if you got a $200 loan, 10 percent, or $20, would be put aside in a savings account at your credit union and the money would be yours after you pay off the loan.
“At the end, they would actually have some money in a savings account, as opposed to not having anything,” Melugin said. “It’s giving them confidence that they can save money, something that they may never have had before, so they may not need a loan the next time.”
• The ability to make periodic loan payments.
Even payday lenders acknowledge that competition is good.
“Markets work effectively when there’s competition,” Norcross said. “As long as there is full disclosure of all the rates and the terms, and as long as the customer understands exactly what they’re paying for the amount that they borrow, that’s fine. If they can help their members over tough financial times, that’s great.”
Most important, by developing the loan product, the credit unions are keeping with their mission of raising the financial literacy and status of their members.