WASHINGTON–Credit union small-dollar loan volume hit a new high in 2022, according to a new analysis by The Pew Charitable Trusts.
Using data from NCUA, Pew said it found credit unions issued $846 million in loans through the agency’s Payday Alternative Loan (PAL) program in 2022, topping the previous record of $640 million, set in 2019, by 32%, Pew said.
“This increase in affordable, small-dollar credit benefits consumers, because each loan represents hundreds of dollars in potential savings compared with high-cost loans from payday, rent-to-own, or other similar lenders,” Pew Charitable Trusts said. “The growth means that more borrowers with limited or no credit history have been able to borrow funds quickly to cover urgent expenses and avoid more costly alternatives. Expanded automation has helped drive recent increases.”
History of PALs
Pew noted the PAL program, which began in 2010 and was expanded in 2019 to boost consumers’ access to affordable small loans limits application fees to a $20 maximum and interest rates to a 28% maximum.
“So borrowing $500 for three months under this program costs no more than $44, compared with an average of $450 to borrow that same amount via payday loans,” Pew Charitable Trusts explained. “The amount originated each quarter in 2022 represented the highest volume ever originated under the PAL program, starting with $195 million in the first quarter and reaching $227 million in the fourth. The previous top quarter figure had been $174 million in the fourth quarter of 2019.”
Banks Also Enter Market
Pew went on to note the increased lending from credit unions comes as six of the eight largest U.S. banks have also started offering affordable small installment loans or lines of credit.
“The products from large banks are fully automated, and customers apply through online or mobile banking,” Pew said. “The same is true for many of the credit union offerings. That’s important because payday and high-cost lenders in the past have been quicker at providing funds than banks and credit unions, giving the high-cost lenders an advantage with customers in financial distress seeking funds for urgent expenses.”
Automation Makes a Difference
But now with automation, banks and credit unions can deliver loan proceeds to consumers faster than high-cost lenders—and keep those borrowers in the banking system, Pew added.
“Automating small-dollar lending requires a substantial investment in technology, so credit unions and midsize or small banks are mostly using vendors that have developed platforms that specialize in processing simple applications and underwriting these loans. Credit union adoption of automation has picked up recently, helping fuel the rise in small-dollar lending,” Pew Charitable Trusts said in its analysis. “For example, one technology vendor, QCash Financial, based in Olympia, Washington, provided automated small-dollar lending to 25 credit unions in 2021, but it now serves more than 90. Another vendor, New York-based Happy Mango Credit, has found that credit union clients that issued just a handful of small-dollar loans per month on an ad hoc basis could better meet members’ needs after automating the process, and now some issue more than 100 per month.”
One CU’s Experience
Michael LeForce, vice president of marketing at USE Federal Credit Union, told Pew Charitable Trusts, “The self-service aspect has been a game changer for us and our members.”
USE FCU automated its small-dollar lending with Ft. Lauderdale-based Velocity Solutions.
“Many credit unions that have automated the process no longer use a credit report and instead determine eligibility based on factors such as whether the member has an account history and makes regular deposits,” Pew Charitable Trusts stated. “The small-dollar loans are available to members rather than the general public, but these restrictions need not constrain improvements in consumer access because 95.5% of households today have an account with a bank or credit union; users’ eligibility then can be determined from their checking account history rather than their credit scores.”
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