are affordable payday loan alternatives viable for credit unions to deliver?
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Are affordable payday loan alternatives viable for credit unions to deliver?
Presentation by Gareth Evans: Financial Inclusion CentreWelsh Credit Union Conference (Cardiff) – Thursday 17th July
What is a payday loan?•Despite the name a payday loans are just small, short-term unsecured loans.•It doesn’t matter whether the repayment of loans is linked to a borrower's payday•Typical amounts are £300-500 paid pack over 1 month or earlier
Is this too far from what is already being
offered by many credit unions?
Threat or opportunity?• Huge market - Financial year 2012:
• £2.8 billion lending • 1.8 million customers (5.7 loans per user).• 10.2 million new payday loans.
• Between 2011-12 – loan volume increased 35% and loan value 45%
• 70% by the big three – Wonga, MoneyShop and QuickQuid.
• 80% Payday customers apply online (35% of all new customers via lead generators)
Threat or opportunity?• Payday lending in Wales – approximately 3%
of PDL market:• £84 million lending (total interest = £25million + total rollover
interest/fees = £31million)• 54,000 customers • 306,000 new payday loans.
Do credit unions want a piece of the market and can we set
ourselves apart?
Threat or Opportunity?• Short-term lending is nothing new.• Taken off due to greater demand and technology (we
have we let in competition as too slow to make decisions / transfer funds).
• Members already borrowing from payday lenders.• Makes decisions on lending to them riskier – multiple
loans indicate inability live within means.• Many potential members getting into trouble and
want to consolidate.• Lenders moving into longer term loans
So why aren't we competing:Challenges delivering viable payday loans:•Fundamental barrier has been interest rate cap (26.8% now 42.6%) - financial returns make such short-term, high risk loans immediately unprofitable. •IT infrastructure to deliver instant online application / assessment / dispersement platform.•Capital for lending (less of an issues amongst CUs). •Capacity and capability of credit unions.•Inclination / aspirations to deliver.
Why LMCU established a payday loan product:• Meet the borrowing needs of existing
LMCU members - shown to be using high cost payday companies.
• PDL product would attract new members using payday loan ‘banner’ and would go on to become long-standing members who use the range of services offered by LMCU.
LMCU payday loan scheme:
Model for alternative payday lending through credit unions:•‘Loss leader’ model – knew that it would loose money.•‘Gateway’ product for new members
Pilot project funded by:
Retain ‘positive’ characteristics of payday loans: Accessible and convenient online access 24/7 Simple and quick application forms Sophisticated credit assessment enabling
instant decisions Instant transfer of funds – transfer fee (£11) or
paid via BACS (free).
Design out ‘negative’ characteristics:X Affordable – Interest at 26.8% APR (now 42.6% APR) on
the declining balance (£3/£100). Compared to average £30/£100.
X Affordability checks - new applicants must be employed, earning more than £12Kpa and a current account.
X Flexible repayment period over 1, 2 or 3 months. (Subsequent loan up to £1,000 over 6 months).
X Repayments taken automatically from the borrower’s bank account on the agreed date(s) – not sporadic CPAs
X No rollovers or late payment penalties (int continues).X Access to sustainable/longer term credit and debt advice.
Pilot Evaluation:• Measure the success of the pilot project between launch
February 2012 preceding 12 months.• Quantitative analysis of LMCU data recorded during the
payday lending pilot to:– Examine actual performance.– Profile new and existing borrowers.– Assess subsequent patterns of financial service usage amongst
new members to help determine the actual cost implications of delivering such a payday loan product.
• Consultation with LMCU payday loan users:– Surveyed 210 borrowers (17%) on attitudes and behaviours
towards the payday lending and LMCU service.
Payday loan pilot performance:• Proved extremely
popular - 6,087 applications received (or 500 pm) for £1.5m (average requested loan amount of £238)
• 2,923 payday loans approved with a value of £688,000 to 1,219 different borrowers.
Payday loan pilot performance:• Average of 2.39 payday loans per borrower (62% repeat) –
industry = 60% repeat & 3-4 loans with same lender• Applicants liked flexible loan repayment terms.
Payday loan pilot performance:
Attracting new members:
• Median Income (after tax) - £1,576pm / £18,912pa
• Income brackets:– Tier 1 (Above £23K AfT) = 26%– Tier 2 (£13K-£23K AfT) = 58%– Tier 3 (Below £13K AfT) = 16%
• 9.8% homeowners
Payday loan pilot performance:• Delinquency levels relatively low:
– 6.3% of all LMCU PDL (or 5.2% of total lent) being at least one month in arrears
– 1.6% of all LMCU PDL being over 3 month in arrears– Arrear levels amongst new members much higher (12% - 4.8%
1month / 4.4% - 0.8% of LMCU PDL 3month).
• Compared to between 28% (OFT) or 35% (Competition Commission) delinquency in rest payday loan industry – where loans being rolled over.
Savings for LMCU PDL borrowers:• An affordable PDL product has the potential to save
significant amounts for borrowers. – Average PDL £265 charged at £25 /£100
borrowed. – This typical loan repaid over 1 month would
therefore cost at least £66, compare to just £5.30 with LMCU.
• By borrowing through LMCU, the 1,219 members collectively saved £145K in interest charges alone (£119 p. borrower or £50 p. loan)
Saving for Welsh households:
•Payday lending in Wales in 2012 cost welsh consumers: • total interest = £25.2million• total rollover interest/fees = £31.0 million•If PDL lending via LMCU at 42.6% APR:• total interest = £2.52million• total rollover interest = £396,900
Annual saving to welsh households = £53.2 million
Preventing future PDL use:• 74% of borrowers had previously taken average of 3.2 loans over 12
months before their first LMCU PDL– Worryingly, 17% of these had taken six or more loans.
Preventing future use of PDL:• Payday lending through a CU is an effective way of
diverting away from high cost lenders – 2/3 LMCU users unlikely to borrow from other PDL companies again.
• Primary reason for borrowing through LMCU was the low cost (66%). • Others liked it was offered by CU(19%) and longer
repayment option (10%).• Satisfaction levels were very high with 74% very
satisfied and 24% fairly satisfied. • All those payday users surveyed were willing to
recommend friends/family.
Subsequent use of LMCU services:• CU membership encourages recent joiners to build financial
resilience through the accumulation of savings. • Almost £18,000 accumulated by 331 new members – a £53 per member (£95 for
new member who had been with LMCU for at least 9 months).
• Quarter of new members opened a CUCA with LMCU• Initially attracted by access to short-term credit but 27% of the
331 went on to take out longer-term loans. • LMCU lent an additional £90K in non-payday credit (generating over
£15,000 in interest) – an average of £1,044 over 17.9 months.
• Longer-term loan usage increases dramatically with membership.
• Over 40% of new members with at least 6 months membership take out a longer term loan (52% with at least 9 months).
Financial viability of PDL product
Estimated income from delivering PDL product:• Each PDL generates an average income of £12.02 (total
income £35,142)•77% of this revenue is from loan interest (or £9.23 per loan), 21% from the option for instant transfers (£3 per transfer) and just 2% from joining fees (£2).
• Additional net profit generated from new members taking out additional longer-term loans was approximately £13,000 or equivalent to £40.16 for every new member.
•Those who joined the credit union within the first three months of the pilot, each generated the credit union approximately £87.51.
Financial viability of PDL productEstimated cost of operating the PDL product:• Each PDL costs an average £11.99 (total
expenditure £35,058)•LMCU estimates cost for making a first loan is £18.57 but repeat loans are £4.00 as fully automated and requires no external checks.•Additional costs of over £4,500 to administer refused or ineligible loans.
• Just over £15,000 during the pilot was determined as delinquent together with over £400 in credit control costs.
Financial sustainability of an alternative PDL product• Payday pilot not financially viable at the point of
evaluation - pilot generated an actual loss of £6,725 (£2.30 for each loan)
• Model is financially sustainable when additional income generation levels projected for new members with LMCU for at least 9 months:• Would actually realise a net profit of at least £8,950
or £3.06 for every loan
Financial sustainability of an alternative PDL product• Modelled the effect of April’s interest rate increase
to 42.6% APR (£100 borrowed for 1 month cost £3 (rather than £2):
• Increased profit margins would have resulted in £9,311 profit or £3.19 per loans (with additional income from use of other LMCU services).
• OR projected overall net profit of £25,000 if all new members generated additional income as identified amongst 9 month membership
What Next?• LMCU continued the payday loan product • Now almost 10,067 loans and £2.63 million lent saving –
current £565,000 in interest. • New members - 1,040 taking 2,227 loans• Second evaluation (hopefully!) – 2.5 years lending evidence.
Questions and debate?
• Should we be operating within the payday loan market?• Is this the right product for credit
unions? • How do we scale the product to
provide greater coverage?
Gareth Evans Associate Research Manager
Financial Inclusion Centre E: gareth.evans@inclusioncentre.org.uk W: www.inclusioncentre.org.uk
Payday loan customers• Median net household income - £24,000• 70% need a loan due to change in financial circumstances.• Reason for borrowing:
• Living expenses (50%)• Car/vehicle expenses (10%)• Clothes/household items (7%)• Holiday (4%)• Pay off other (non payday) debts (4%) and Repay another payday loan (2%)• Rent/mortgage (4%)• Socializing (2%)
• 60% of new customers take out a further loan with same company (and will take out 3-4 additional loans in same year)
• 40% say could not have used alternative lending source • 29% turned down for credit in last 12 months
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