Editor’s note: This article was updated on April 7, 2023, to correct the total volume of Payday Alternative Loans issued by credit unions in 2022. The piece described the loan volume as if each quarter’s reported lending was originated during that quarter, but each quarter’s report actually covers a rolling 12-month period, meaning aggregate volume is lower than originally described.
New data from the National Credit Union Administration (NCUA) shows that credit unions issued $227 million in loans through the administration’s Payday Alternative Loan (PAL) program in 2022, topping the previous record of $174 million, set in 2019, by 30%.
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. 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.
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.
The amount reported each quarter in 2022 represented the highest volume ever originated under the PAL program, starting with $195 million reported (over the previous 12 months) in the first quarter and reaching $227 million in the fourth.
Todd Harper, chairman of the NCUA, said the PAL program is meeting a clear need.
“The rapidly changing rate environment has not slowed the rising demand for small-dollar, short-term loans at federal credit unions,” Harper said. “With the help of technology, credit unions are being increasingly responsive to this need while operating within current interest rate caps, adhering to the NCUA’s updated supervisory guidance for interest rate risk, and remaining committed to meeting the financial needs of their members—especially those of modest means.”
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. 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.
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.
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.
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.
Because credit unions don’t make much money on fairly priced small-dollar loans, it can be hard to provide this kind of credit sustainably if their employees must spend time working on each loan application. Automation means providers can keep costs low, because staff time is not required to process applications, underwrite loans, or disburse funds. Similarly, most customers use autopay features to repay loans electronically. That can minimize staff workload and improve consumer experience.
“The self-service aspect has been a game changer for us and our members,” said Michael LeForce, vice president of marketing at USE Federal Credit Union. His organization automated its small-dollar lending with Velocity Solutions, a technology provider based in Fort Lauderdale, Florida.
Eileen L. Phelps, chief operations officer at Credit Union of America, noted that after making similar changes using Velocity, her organization’s automated small-dollar lending now “requires no staff intervention” and members go “from request to funding in mere minutes.”
Many credit unions have long offered low-cost, small-dollar loans. But when members needed to cover urgent expenses, they often did not choose these loans in part because previously, they had to submit in-person applications. They also were uncertain about whether they could qualify for the loan or get the loan proceeds quickly enough. The process often proved too slow because credit unions would base eligibility on credit reports and handle each step of the process manually.
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. 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.
If more credit unions automate the small-dollar loan process, more households should be able to avoid hardships—such as missed bill payments, evictions, auto repossession, or utility disconnection—without turning to high-cost lenders.
Although the number of credit unions automating small-dollar lending has been rising and volume has hit an all-time high, a review of the websites for the largest 40 credit unions shows that only seven of them offer automated small installment loans or lines of credit. This reality indicates that credit unions need to make much more progress to achieve financial inclusion and meet the needs of their low- and moderate-income members. A strong indicator that credit unions are achieving their missions would be if these products become more universally available.
Alex Horowitz is a principal officer and Chase Hatchett is a senior associate with The Pew Charitable Trusts’ consumer finance project.