The Complex Nature of Payday Loans and Why Credit Unions Cannot Bridge the Gap

Despite the booming payday lending business, the complexities of this market seem to make it impenetrable by lending institutions like banks and credit unions. Payday loans also referred to as predatory loans are designed for a very particular group of consumers. These are consumers ailing with demise of failing to meet their financial obligations. The consumers have categorically been underserved by traditional financial institutions because of bad credit history.

Banks and traditional lending institutions feel that they risk their business by dealing with this group of consumers. However, there are payday lenders who are willing to take the risks and offer financial help to the consumers with bad credit reports and who cannot access loans from credit unions and banking institutions.

In recent years, banks and credit unions seem to be offering some type of short term loans similar to payday loans. A presentation by the National Credit Union Foundation entitled “Real Solutions to Members’ Payday Loan Needs” shows that consumers are saving millions of dollars in fees through credit unions. This breakthrough is achieved by offering payday loans at break even prices.

This is certainly a positive move by the credit unions to offer such a high stake loaning facilities. The big question is; what kind of consumers are benefiting from these loans? Traditional payday lenders deal with a very peculiar consumer who has tainted score and cannot access loans from other institutions.  Although credit unions can offer payday loans at cheaper rates, it is most unlikely that they will serve the market.

The number of people with bad credit and who cannot access loans from banks has increased following the aftermath of recession. This means that there is high demand for fast cash that does not require credit check. Credit unions may not be willing to risks their operations by immensity venturing into the payday business.

Operating at breakeven point is purposely meant to help the consumer but unfortunately the demand is too high. Those consumers with very deep financial crisis and need fast cash will end up seeking for payday loans. There is also an argument that encouraging credit unions to provide payday loans means that they are engaging in a manner that is likely to spar disagreements among the financial regulators and consumer protection bodies.

The credit unions are competing directly with traditional payday lending operators by selling short term loan at high prices than they are actually allowed to charge on any other credit products. However, the consumers being served by the credit unions may not necessarily have poor credit score and they may be able to negotiate for other low priced loans.

Credit unions may further limit their payday loan offers to consumer who have verified income, have no delinquent loans, and are not in the course of filing for bankruptcy. This means that there is still a marginalized population that may not be able to access the credit unions payday loans. In essence, the complex nature of the payday loans consumers may not allow credit unions and other institutions to venture extensively in this business. The risks involved are just too high to bear and the regulations cannot allow the credit unions to raise the interest rates beyond certain margins. This means that payday lenders will have less competition and thus the rates may not subside any soon.