No Longer in the Shadows, Payday Loans Go Mainstream As Banks, Credit Unions Seek New Customers
July 11th, 2008
With gas and food prices spiraling higher, more middleclass American are coming up short between paychecks.
Many are turning to payday loans to bridge the gap. A payday advance is a small short-term loan without collateral. It's repaid on the borrower's next payday.
Typically, a customer uses a payday loan to cover small, unexpected, expenses between paydays. The money is often used to avoid expensive fees on bounced checks, penalties on late bill payments, overdraft charges and other less desirable short-term credit options.
Industry analysts estimate that more than 22,000 payday advance locations across the United States extend about $40 billion in short-term credit to millions of people.
A new report by the Center for Financial Service Innovation — a non-profit affiliate of ShoreBank Corp. that facilitates financial services industry efforts to serve underbanked consumers — says payday lending is going mainstream.
Credit unions and banks are beginning to recognize the need for payday loans and the size of this underserved market.
Several individual credit unions, the report says, have begun to offer cash advance loans. These offerings acknowledge the growth of payday loans and aim to give credit union members a valuable service.
According to the report, one of the largest credit unions in the nation, the North Carolina State Employees' Credit Union, now offers salary advance loans. This cash advance features a savings component with 5 percent of the advance placed into a credit union cash account as collateral.
Dating back to 2001, the North Carolina cash advance loan program has served nearly 100,000 members with loans totaling more than $1 billion.
The Savings Bank of Wakefield, Mass., has a small-dollar loan product it offers as a payday loan alternative — and makes it available to non-customers as well as current customers. These are closed-end, simple interest loans ranging from $300 to $1,000. They are available at an 18 percent APR interest rate, the same as their unsecured overdraft line of credit. Repayment terms range from 18 months for a $300 to $500 principal to 36 months for a $501 to $1,000 principal. A credit report is processed for all applications.
Wells Fargo and U.S. Bank now offer cash advance loans. Both charge borrowers $2 per $20 advanced, equivalent to an APR of 120 percent. Wells Fargo's Direct Deposit Advance service allows account holders who receive a monthly direct deposit exceeding $100 to access the advance line of credit through an ATM.
In offering small-dollar loans to non-customers, banks and credit unions hope to gain access to new client prospects