April 23, 2018
Ann Flannigan, Vice President of Human Resources, WSECU
According to a recent survey conducted by CareerBuilder, eight out of 10 Americans live paycheck to paycheck. They are not able to save money for an unexpected expense. Most financial advisors recommend three to six months of living expenses in a savings account. Yet, 35% of Americans have fewer than $500 in savings.
If Americans are living paycheck to paycheck and have less than $500 in savings, what happens if there’s an emergency that costs them at least $1,000? With payday lenders shutting down and being subjected to such strict regulations, how will Americans survive?
It’s a fair question. But there’s a good reason regulators are requiring new payday loan regulations.
How payday loans work
While payday loans certainly fill a valid consumer need, it’s important to consider the loans’ long-term effect on borrowers. In an actual emergency, people are desperate for money and won’t necessarily read (or think about) the fine print. Or even if they do read the fine print, they’re willing to accept terms they wouldn’t under normal circumstances. After all, if they’re facing a medical emergency, they’re more concerned about your health or the health of their family member or beloved pet than negotiating a contract that discloses the interest rate or the fees associated with renewing the loan.
If they have a $700 emergency or unexpected expense, maybe they could have managed to pay that out of their next paycheck. But a $700 payday loan doesn’t just cost $700. There’s interest to pay. On average, a payday loan has somewhere between a 400% and 790% interest rate. What’s 400% of $700? The answer is $2,800. Over the course of a year, if a borrower kept renewing the loan, it would cost them almost $3,000. And that’s just the low end of the interest scale – we don’t have to show you the math for an annual 790% interest rate to make that point.
When payday loans are renewed, the lender often requires the borrower to pay a renewal fee as well. Yet, many borrowers don’t recognize that interest rate is also accruing on the amount owed. Depending on the structure of the payday loan, it can only be renewed so many times before the lender takes the full payment, usually via ACH out of the borrower’s bank account. While this helps stop people from going further into debt because of interest, the full amount is usually a shock to the borrower.
CFPB regs explained
The Consumer Finance Protection Bureau (CFPB) released new rules in 2017 regulating payday loans, auto title loans, and advance deposits that require full payment, because they leave borrowers in an even worse financial situation. These borrowers are already stretched to their financial limits. Requiring them to repay payday loans in full usually means they no longer have the ability to pay for groceries, electricity or rent.
Of course, predatory payday lenders are well aware of this conundrum. In fact, it’s the cornerstone of their profitable business model. Once a customer, always a customer.
Under new CFPB regulations, in states where payday lending is legal, lenders must now use a repayment test known as the “full-payment test.” It requires proof of income from borrowers, and also limits the number of payday loans to no more than three loans “in quick succession.”
Lenders are also required to use credit reporting systems registered through the CFPB to get information and report the loans they’re funding.
There’s one exception to the new rule: Consumers borrow up to $500 without passing the full-payment test if the loan allows the borrower to repay it over time, in installments. However, if the borrower has an outstanding payday loan, recently took out a payday loan, or has an outstanding balloon payment loan, they cannot be approved for an additional payday loan under this exception.
QCash bridges the payday loan gap
Credit union members have an alternative to traditional predatory payday loans. QCash is a short-term loan solution in which borrowers can conveniently apply online with no credit check. With QCash, borrowers can apply to receive an instantly funded, short-term loan of up to $700. Installment payments are automatically drafted each month from their credit union or bank account.
The interest rate on Q-Cash is significantly lower than traditional payday loans. With Q-Cash, borrowers pay just $12 for every $100 they borrow. That’s around 12% interest each year. So, a $700 Q-Cash loan would cost around $784. Compare that to our $700 payday loan example above that cost $2,800.
QCash Plus is available for borrowers who need more short-term loans between $701 and $4,000. The interest rate for QCash Plus is 36%. The application process for QCash Plus is very similar to that of QCash. It’s done online. There’s no credit check. However, there is a $25 application fee.
If approved, the borrower’s account is instantly funded. Repayment is the same as with QCash: Each monthly payment month is automatically deducted from the borrower’s account.
The goal of QCash and QCash Plus is to provide credit union members with a way they can meet their short-term needs without taking out dangerous payday loans. Our solution ensures that Americans will not only survive short-term financial needs, they will thrive long term.