The impact of payday alternative loans on credit union performance and loan quality

Federal regulators in 2010 amended lending rules to allow federal credit unions (FCU) to originate short-term, small-dollar amount loans, with an annual percentage rate of up to 1000 basis points above the otherwise imposed interest rate ceiling of 18 percent. The purpose of the change in policy was to allow FCUs the ability to provide their members with an alternative to payday loans. We find the decision to originate these higher-interest loans is primarily influenced by the characteristics of a credit union's environment. Credit unions located in minority neighborhoods and in markets with fewer traditional financial services are more likely to participate in the payday alternative loan program. Participation in the program is shown to improve earnings performance without adversely affecting participants' loan quality. These results suggest credit unions can provide lower-priced alternatives to payday loans that are beneficial to members and their credit unions.