Clint Says read with some interest a statement from the North Side Community Federal Credit Union, located in the fair city of Chicago. North Side has caught the vision of how to better offer payday loans, cash advance loans, and other short-term credit products as its introduced its “PAL” program. Here are the details of their payday loan alternative:

-Average loan is $500 ($75.00 of which the credit union doesn’t allow the borrower to use, so the true principal loan amount given to the consumer is $425.00.

-An “reasonable” APR of 16.5% (why are the payday guys out of business yet? Let alone subprime credit card providers?)

-A $30.00 “application fee” (Why doesn’t this get rolled into the APR?)

-Hopeful borrowers must attend 4 financial education seminars (Can you see someone who needs an emergency loan waiting around to complete the four part series? Me neither).

Of course, the program superficially looks good to consumers, and why not? 16.5% APR verses a 391% APR product? You would have to be a fool to choose the more expensive loan. The question that interested policy makers and informed consumers should ask is, “why does the program have fewer than 1,000 participants in a city of nearly 3,000,000 individuals?” I can assure you its not because the credit union lacks a decent marketing budget.

In a press release from NSCFCU about the PAL program a couple of years ago, the organization, which relies heavily on bounced check and courtesy overdraft charges (60% of fees according to a recent article by Forbes Magazine) bemoaned the fact that at the time it was only charging those in need of short-term loans a $10- application fee, to quote the release:

“We currently charge only a $10 application fee for the loan. Increasing this fee to $20 would at least help cover our costs of the program.”

Since then, the program has increased is self proclaimed innocuous “application fee” from $10.00 to $20.00 and then to $30.00. Does the $30.00 fee cover the program costs? A look at the NSCFCU loan product using a comparative APR will shed more light on the application fee.

Remember the terms of the loan? $425.00 in principal, 16.5% APR, and a $30.00 application fee. To calculate the APR we need the duration of the loan. The vast majority of cash advance loans are repaid in 13 days (NSCFCU gives a borrower up to six months, but verifiable consumer behavior shows the majority of these loans are paid in full after two weeks). When calculated on a a two week basis the credit union payday alternative loan’s APR is 231.02% compared to a payday loan of 391%. Payday lenders have claimed that at the interest rates they charge they receive a paltry 6.6% net profit or the same as an average Fortune 500 company in 2007. Patrons should not be surprised when the CU asks for an increase in the “application fee” from $30.00 to $40.00 in the near term to help them break even.

Regardless, the alternative loan product remains somewhat cheaper, but why the continued lack of interest?

The requirement to go through weeks of financial seminars although noble and good, is unrealistic for many people who rely on short-term loans to help meet unexpected financial issues. All people who use cash advance loans are employed. Many work two jobs to get by. The last thing these working and middle class people have time for when they are in a bind is a four-week series taught by someone who looks down on the way they have handled their finances. What the credit union doesn’t realize or simply don’t care about, is these classes create a burden more costly that what they would pay at any online cash advance or payday loans provider. Time in many instances is more precious than saving a few dollars (the cost difference between most payday alternatives and cash advance products).

Payday advance and pre-paid VISA card providers have and will continue to succeed in their mission to provide short-term credit at reasonable prices because they have put themselves in the shoes of their borrowers.