Even before the pandemic recession caused by the global COVID-19 outbreak, life had its way of springing surprises on us all, and few Americans realized true financial freedom. Car repairs, medical emergencies and other expenses seem to pop up at the worst time, and for many Americans, all of 2020 has been the worst time. Now more than ever, many Americans live paycheck to paycheck. Even those who have savings may not have saved enough money to account for an unexpected bill from the mechanic or emergency room. Many people in the market for a short-term loan could have afforded to pay for such a surprise had it occurred right after payday. They may turn to predatory payday lenders to get the money they need, placing themselves squarely in the path of a debt trap. Thankfully, many credit unions now offer payday alternative loans (PAL) using the QCash Financial platform to help their members meet sudden needs.
Just how different are PALs from predatory payday loans? At first glance, they seem similar, but that first glance is misleading. Understanding their differences is crucial.
Small Dollar Lending: The Basics of Payday Loans
A payday loan is a short-term, high-interest cash loan, usually granted to borrowers with poor or no credit history. The borrower writes a postdated personal check for the amount borrowed, plus a high-APR finance charge, then receives cash. The lender holds the check for future deposit (or electronic deposit) on the next payday. In the case of some payday loans, borrowers sign over electronic access to bank accounts for automatic repayment.
When that next payday hits, the loan amount and the finance charge are paid in one lump sum. Borrowers can pay the loan either by redeeming the check and paying with cash, allowing the check to be deposited by the lender or paying just the finance charge and rolling the loan over for another pay period.
Small Dollar Lending: Payday Loan Terms
Payday loan amounts vary according to state law, but typically range in size from $100 to $400, and the average loan term is about two weeks. Finance charges range from $15 to $30 for every $100 borrowed. For a two-week loan, these finance charges typically result in interest rates from 390 to 780% APR. Shorter term loans have even higher APRs. Just imagine financing a car or mortgage at a 400% interest rate; now remember that most payday loans are taken out in emergency situations.
To take out a payday loan, borrowers must show proof of residence, proof of income and photo ID. The in-person process can take as long as two hours, and even the online application process can be cumbersome and time-consuming. In an emergency, borrowers may be short on time as well as cash.
Affordable Payday Alternative Loans Through QCash Financial
The QCash Financial platform facilitates two different types of PALs: fee- and interest-based. Both help credit unions offer members longer loan terms and lower fees than predatory payday loans. With a fee-based loan, the fee is $12 for every $100 borrowed up to $700, but the borrower has 60 days to pay. That calculates to a 72% APR. With an interest-based loan, members can borrow between $701 and $4,000 with a $25 fee and 36% APR. Interest-based loans are amortized over a 36-month term.
Both types of QCash Financial loans offer easy 60-second underwriting, automatic funding to the borrower’s account and automatic repayment from the member account. They base eligibility and approval on member relationships and experience with credit unions, rather than credit history. Once the member completes the online application process through the QCash Financial link on the credit union website, approval takes a matter of seconds, and the money is automatically deposited into their account.
What’s the Difference?
Apart from the obvious differences in interest rates and convenience, payday loans and PALs serve a similar basic function: short-term lending in emergency situations. The differences run deeper, however. Like most banks, payday lenders are for-profit companies, albeit with significantly higher profit margins and questionable business practices. In addition to their common presence in lower income neighborhoods, for example, there are often rollover fees (plus the original high interest rates) for those who can’t repay a loan by the next payday. Many payday lenders don’t allow for payment plans, which would make those loans easier to pay off in smaller amounts at a time, and some engage in outright illegal practices like threatening criminal charges.
Credit unions, on the other hand, are not-for-profit entities, owned by their members. This not only allows credit unions to offer lower interest rates on their loans, but also means credit unions operate on a different philosophy entirely. Credit union members are just that: members. They’re not treated like customers, because they aren’t; they’re invested in their credit union’s success, and credit unions treat them like business partners.
At QCash Financial, we’re proud to offer fintech solutions that help credit unions help their members. Through QCash Financial’s small dollar lending platform, credit union members have instant access to responsible, affordable small dollar lending programs when they’re needed most. We run our business with the same core values as credit unions: members’ financial health and financial freedom.
For more information on how we can help, please visit https://qcashfinancial.com/, where you can download our Member Crisis Guide, request a demo or access a series of webinars featuring our CEO, Ben Morales. Further, we regularly post timely, informative blog articles that address the financial issues facing today’s credit union members. Contact us at 800.893.7893, info@qcashfinancial.com or through our online form for more information.
