LAKE BLUFF, Ill.—A new study found that it could be time for CUs to change their attitude about "predatory" payday lenders.
That's because payday lenders often charge less than 75% of what depository institutions do for a $100 cash loan. The study, by Moebs Services, found that payday lenders charge a median price of $18 for that amount, vs. $25 at main street CUs and $28 at larger CUs.
Big banks charge a median price of $35.
Moebs Services conducted the survey of 2,890 banks, thrifts and CUs as well as 454 payday lenders in June. As much as 40% of what it refers to as the "small cash market" (about 40 million consumers) is liquid and frequently has short-term cash needs, which are often met by payday lenders rather than FIs, according to the study.
Many CUs' and consumer advocates' arguments against payday lenders center on exorbitant rates. This research, however, noted that truth-in-lending formulas are "not very accurate" for calculating APR when dealing with loans below $2,500 or above $25 million, because inputs can vary in size and are often not proportional.
"Using APR to report the pricing of small loans or overdrafts is like using a clock to time a sprinkler," said Michael Moebs, CEO of Moebs Services. "Reporting the price of payday loans as a 'free' rather than quoting an APR gives a better picture of the out-of-pocket cost for the consumer."
While as many as 19 million consumers frequently use overdraft protections—either priced as penalties or as a safety net—the Moebs research noted that as many as 23 million consumers use payday lenders to cover overdrawn accounts. (The study defined a frequent user of overdrafts as a consumer making 10 or more of them a year.)
Because of the large number of consumers relying on payday lenders, Moebs noted that "if the industry were regulated out of existence it would create a void that banks, thrifts and credit unions could not fill financially. Hopefully other solutions for small cash market needs will develop."
