MANHATTAN BEACH, Calif. — Kinecta FCU has launched two small-dollar loans that test alternative underwriting guidelines to serve the underbanked.
The consolidation loans enable members to convert multiple outstanding payday loans into a single installment loan.
The $3.2 billion CU expects the offerings will help break the cycle of consumer payday debt here, get many new members on the road to financial health and potentially open up a new market and revenue stream for the credit union.
"The small-dollar credit market last year was about $80 billion, and it is growing at 8% annually," said Luis Peralta, COO of Kinecta's Nix Neighborhood Lending arm.
Kinecta in 2007 purchased Nix Check Cashing and will only offer the loans through its Nix locations, starting first with a pilot out of the Englewood office.
Breaking the Payday Cycle of Debt
But Peralta said that a solid revenue stream, which would only come years down the road once new underbanked members gain sound financial footing, is not the reason for the venture. He said the goal is to break the payday cycle of debt that is plaguing many residents in the Los Angeles metro area.
The loans, Payday Payoff and Payday Payoff Plus, were hatched from the Small-Dollar Credit Test and Learn Working Group, efforts out of the Center for Financial Services Innovation.
Both loans require credit union membership and are reported to credit bureaus.
Payday Payoff loans range from $200 to $499 and charge 18% APR, with a one-time fee of $31.95.
"In California payday loans are limited to $300," explained Peralta. "If someone has a $300 loan and rolls it over for six months, in that time they will pay $585 in fees to the payday lender and still owe $300 at the end because they never paid down the balance. With Payday payoff, over that six-month period, they will only pay $46.65 in interest and fees. They will save over $520."
Payday Payoff Plus starts at $500 and goes to $1,000, charges 28% APR and comes with a $20 application fee.
"We know a lot of these people have more than one payday loan," said Peralta. "For example, if they have three payday loans they have $900 in debt and in six months will have paid, just in fees, close to $1,755. And they will still owe $900. With us they pay $89.11 and save about $1,650."
By offering the products at only one location, Kinecta is putting its toe in the water to test a new underwriting model that relies on alternative credit data, such as rent, and non-traditional scoring methods.
"We are partnering with LexisNexis to develop the model," said Peralta. "As part of these guidelines, ensuring ability to repay is critical."
With Payday Payoff and Payday Payoff Plus having launched June 9, Peralta said it's too soon to evaluate results — but the target is to get 1,000 loans in next three to four months.
"We don't see financial institutions here wanting to work with this segment of the population and provide affordable loans," he said. "We expect the program will get many people in this community out of the clutches of payday lenders."
