Payday borrowers prefer loans with fewer restrictions, even if that means higher interest rates, a new study shows.
Even if credit unions offered short-term loans at better interest rates and lending terms than payday lenders—and most don’t—current payday loan customers would still prefer the convenience of payday lenders, according to the study.
The growth of payday lenders has led to a policy debate about whether credit unions can offer the same short-term loans with less financial burden on consumers, says the study’s author, Victor Stango, an associate professor at the Graduate School of Management at the University of California, Davis.
“Expecting . . . credit unions to provide borrowers with lower-priced but otherwise similar short-term loan products is unrealistic,” Stango says.
Data from the National Credit Union Administration cited in the study reports that only 6 percent of credit unions offer such short-term loans because credit unions see them as too risky and expensive to maintain. And payday loan customers say they prefer the longer business hours and easier lending requirements of payday lenders, despite the high interest that payday lenders charge (391 percent APR, or annual percentage rate).
This APR is based on a typical payday lender charge of $15 per $100 borrowed for two weeks.
“It seems unlikely that credit unions can viably serve as providers of short-term credit to the customers currently served by payday lenders,” concludes the study that is published in the journal Contemporary Economic Policy.
Payday lending has become widespread during the past 20 years, with 24,000 payday outlets operating physical locations in the United States, plus more online. By comparison, there are about 16,000 banks and credit unions with about 90,000 branches. In data collected in 2009, the study cites industry reports suggesting that between 5 and 10 percent of adults in the U.S. have used a payday loan at least once.
The study further looked at existing data on credit union and payday loan trends and statistics, and interviewed randomly selected credit union representatives. As part of the study, a market research firm also conducted in-store surveys of 40 Sacramento-area payday loan customers.
“Current payday borrowers strongly prefer a higher-priced but less restrictive loan to a lower-priced but more restrictive loan,” Stango says.