Consumer groups and academic researchers agree: Payday advance fees are lower than many of consumers’ alternatives, even when expressed as an annual percentage rate (APR). Read more.

Credit unions once offered short-term, unsecured credit to their members, but “somewhere along the way credit unions decided small loans were unprofitable and walked away from them. So the payday lenders came along, recognized a niche market and need, and learned that small, short-term loans could be made profitably.”

“Payday Lending: The Credit Union Way” by the Credit Union National Association Lending Council & National Credit Union Foundation/REAL Solutions(R), looks at the history of the payday loan product, customer demographics and offers guidance to credit unions who offer payday loan alternatives.

The white paper finds:

• Payday lending customers are capable of making rational decisions
• 15-25% of credit union members use payday lenders, credit union employees are also likely customers
• Payday loans can be cheaper than the alternatives, including credit union “courtesy pay”
• Credit unions can exclude application or participation fees in their APR calculations for payday loans. Fees are charged even if credit application is denied.
• Consumer groups fail to recognize that banning payday loans does not eliminate the need for short-term credit
• Credit unions can use varying strategies to mitigate risk

New information from CFSA on the size of the unsecured, short-term credit market.

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Consumer Demand for Unsecured, Short-Term Credit is Undeniable. Millions of Americans are struggling to make ends meet, with nearly half living paycheck to paycheck. Rising unemployment rates have caused more families to transition from two-income to one-income households and hourly jobs and overtime payments are being scaled back significantly.

Market Alternatives. Consumers facing a necessary expense and caught short between paydays must often choose between costly and undesirable options: pay the bill now and face bounced check or overdraft protection fees; pay the bill late and incur late penalties; borrow from friends and family; or take out a loan from an unknown Internet lender. Removing one option in today’s environment will only force consumers into more expensive, less desirable and unregulated alternatives.

Get more information.

The Credit Union Journal is surveying their readers to find out if credit unions, “given the economy”, are offering payday loan alternatives.

Survey: Given the economy, we:

From a report by the Credit Union National Association and the National Credit Union Foundation, “Payday Lending: The Credit Union Way.”

Let’s consider some alternatives for the working mom who is short $100 until payday, 14 days from now. She could get a $100 payday loan, pay $15, and the APR for that two week loan would be 391 percent..

She could also choose to write a bad check and pay an average of $48 in NSF and merchant fees. That would be a comparable APR of 1,251 percent!

Even if she has courtesy pay with her credit union, the average fee is $25, or an APR of 650 percent. Another option for her might be to not pay the $100 minimum balance due on her credit card, resulting in a $26 late fee—678 percent. If she chooses to not pay her $100 utility bill which may result in a $50 late or reconnect fee, that’s a comparable APR of 1,304 percent!

The argument can be made that by securing a payday loan to solve her cash flow needs, this woman is taking a proactive approach to her financial dilemma.

The Center for Responsible Lending indicates the 11 states that banned or limited payday lending saved consumers $1.4 billion in fees in 2006. But eliminating local payday lending activity does not eliminate the need for emergency cash loans. People still come up short prior to payday and the center does not address how these consumers managed their cash-flow problems. If they had to use one of the other alternatives, or had to drive to an adjoining state that made payday loans, or used the Internet to get an even higher priced loan, it is possible consumers in these states paid even more to solve their cashflow problems.

Here’s a story from Mississippi about a new payday lending alternative.  The Payday Pundit thinks this is great.  The more choices consumers have when it comes to short-term financial products, the better!  However, because you’ve come up with an alternative doesn’t mean you should replace existing products.  Let the market work and let consumers choose which product they like better.  There is one thing in this announcement that makes this pundit think that this new loan will not replace payday loans outright:

There are no fees to participate in the BankPlus program, but a credit check is required, and the credit score affects the loan amount for which a customer is approved. Customers also must complete a financial literacy program before they receive the loan and they receive credit counseling once they are approved

One reason people take out payday loans is because there is no credit check required.  Imagine if you’re a busy person and need money today, something tells me you won’t have time to receive credit counseling before you need the money.

America’s #1 Populist, Jim Hightower, has jumped on the anti-payday lending bandwagon and denounced payday loans.  Like so many of the anti-payday lending groups, Mr. Hightower demands that payday lending businesses be shuttered to protect “very-low-wage working people – those living paycheck to paycheck who can least afford to have their pockets picked” but fails to tell those very same people what to do when they need to make ends meet.  If you don’t offer any other option for a clearly defined need, is that actually helpful?  Payday loans are often a less costly option to bouncing a check, paying overdraft fees or other bank charges.  Take away this option, what are consumers to do when they have an unexpected expense?  The masses are waiting for your answer, Mr. Hightower.

Much ado is being made about the FDIC’s pilot program to offer payday loan alternatives.  While the Payday Pundit believes consumers are better off when they have more options, not fewer, the alternatives being offered through the pilot program are by no means a silver bullet. We’ve been tracking these and here’s some of what we’ve found:

• All of the participating banks are small, community-based banks.
• When all fees and interest are added, the total cost of the loan is similar to that of traditional payday loans.  One bank charges a $10 fee to file the application, $15 for the financial literacy class (required) and 18% APR.
• Most, if not all, of the banks in program admit they are not making any money on the payday loan alternatives.
• Requirements and restrictions limit the number of customers who have access.  These include:
  • Minimum credit scores
  • Asking borrowers to pledge cars or other collateral
  • Attending Saturday afternoon financial literacy seminar
  • Opening a checking or savings account with a minimum balance

As mentioned earlier on the Payday Pundit, U.S. Senators Akaka, Schumer, Lieberman, and Inouye have introduced a bill that would create a grant program within the Department of the Treasury.

The grant would encourage the “development of affordable payday loan alternatives at mainstream financial institutions. Consumers who apply for these loans would be provided with financial literacy and educational opportunities. Loans extended to consumers under the grant would be subject to the annual percentage rate promulgated by the National Credit Union Administration’s (NCUA) Loan Interest Rates, currently capped at an annual percentage rate of 18 percent.”

Anyone who knows anything about short-term credit fully understands that you cannot offer payday loans at 18% APR.  An 18% APR would equate to a fee of 69 cents per $100 loaned for the two-week period. Not sustainable. So, federal grants would provide banks and credit unions with the funding to at least break even.

Is this really the best use of America’s tax dollars?