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Short term Lenders Trump Credit Unions for Consumer Convenience

Jun 02, 2012 Philip Burgess

Short term Lenders Trump Credit Unions for Consumer Convenience
A researcher from the University of California Davis recently chimed in on the ongoing debate about whether financial institutions other than short-term financiers - such as short term lenders - can offer alternative finance to consumers seeking a quick influx of cash. His findings indicated that despite some credit unions' decision to provide their own version of short term loans in order to compete, most borrowers still prefer the benefits offered by short term loans.
 In March, The Los Angeles Times reported that the number of regional and community banks stepping into the market started climbing significantly in 2007, with approximately 400 of the institutions signing up customers for such loans. "At a time when banks are struggling for growth, it's certainly an avenue they're going to look at," Greg McBride, senior financial analyst at Bankrate.com, told the newspaper. However, he admitted that it remained a risky move for banks and credit unions because of the high chance for default. "Most current short term borrowers prefer higher-priced but less restrictive standard short term loans to lower-priced but more restrictive alternatives offered by credit unions," wrote Victor Stango, the author of the report, titled Some New Evidence on Competition in Short term Lending Markets. Part of the reason for the perception that credit union loans are more restrictive is the fact that they tend to "ration riskier borrowers out of the market" because they have more stringent restrictions on repayment and loan approval. Additionally, the number of credit unions that offer the financing option is very small, and when the credit union loan prices are adjusted for risk, they may not be any lower than those offered by short term lenders, Stango found. In conclusion, he noted that credit unions and other financial institutions are unlikely to step into short term lenders' territory by offering "lower-priced, higher-quality alternatives" to existing short-term borrowers.  The UC Davis Graduate School of Management reports that the study also cited research from the National Credit Union Administration (NCUA). The NCUA had found that just 6 percent of credit unions currently provide consumer credit services similar to those of short term lenders. According to the school, the last two decades have seen an influx of short-term financing options. While there are approximately 16,000 financial institutions operating roughly 90,000 branches, there are 24,000 short term lending outlets scattered across the U.S. The logistics of securing a short-term loan also came into play, as the management school explains that most responding consumers appreciated the later business hours and more simple qualifications for securing financing that short term lenders promise.