Alternative to Payday Loans: A self-reliant choice
By Insights Team, October 25, 2016
Payday loans and short-term installment loans prey on the urgent need of people for small-dollar amounts and charge very high fees and interest to the borrowers. PayActiv has developed a fintech solution, a real alternative to payday loans that helps ordinary employed people avoid these debt-traps of predatory lending and become self-reliant in managing their expenses.
In recent years, state and federal regulations have been passed to regulate the payday loan industry in order to protect consumers from the deceptive practices of lenders. Despite that, in response to the opposition of single-payment loans, the lenders have introduced an off-shoot of payday loans called short-term installment loans, which allow borrowers to repay the loans over six months or longer, but an average borrower still ends up paying 2 to 3 times of the borrowed amount.
Need for small-dollar loans
Estimated 40% of population who are either unbanked or underbanked (25% of U.S. household) borrow through small-dollar loans, rent-to-own agreements, pawn shops, or refund anticipation loans (FDIC, 2009). In addition, millions in middle-class, who have little or no savings and have maxed out their credit cards, also turn to small-dollar loans in times of need.
The common reasons why families use credit or loan for basic expenses are because either their expenses exceed their income, or an unexpected expense happens like a car break down or more commonly because of the mismatch in timing of their expenses and income. People are paid every two weeks but life happens everyday.
Studies show that the borrowed money is used to pay for basic expenses such as paying utility bills, food and clothing expenses, car repair, or home repair. Not just that, most users of small-dollar loans also report taking steps to reduce spending and going without some basic needs (CFSI Levy and Sledge, 2012).
When faced with payment deadlines, for someone who doesn’t have credit cards the only payday alternatives have been to pay overdraft bank fee if their checks don't clear or to defer paying bills by the due date, which results in additional penalties like late fees and service restoration or reactivation fee. These fees, which we call fee-traps, can easily add up to $100 every month for a low-wage employee.
How payday loans work and the cost to consumer
Payday loans are small-dollar credit against the future earnings in form of a paycheck. The lender takes either a signed check from the borrower, which the lender cashes on the day of next paycheck or the lender may take the checking account information from the borrower for a direct withdrawal from the account on pay day.
The median size of these loans is $350 and the fee or interest charged by the lender typically ranges from $15 to $30 per $100 borrowed for approximately a two-week period. At $15 per $100, for a $350 loan, the borrower has to pay back $402.5 in 2 weeks.
If the loan is not paid back the full amount then it is rolled over until next pay period with additional fee at $15 per $100 of balance.
CFSI estimates that on average a borrower takes out eight loans of $375 each per year and spends $520 on interest.
households take small-dollar loans each year
is given out in small-dollar loans every year
is paid in fee and interest each year.
Small-dollar installment loans and the cost to consumer
While the federal agency, CFPB, has been trying to regulate the single-payment small-dollar credit industry, the small-dollar installment lending has been increasing since 2011, and most payday lenders have developed installment loan products.
Installment loans have larger principal amounts and allow 6 months or more to pay back in small installments. While it is convenient that the payback is in small installments but the interest can add up to several times the original principal.
An average installment loan is $1200 to be paid back in 13 installments at 300% APR, with the borrower paying back almost $3000 in 6.5 months.
Small-dollar installment loans is a $10 billion industry and growing.
Who uses small-dollar payday loans
In spite of the difficult terms set against the borrower, when faced with an emergency people who do not have access to other forms of credit turn to small-dollar loans.
reached credit card limits.
bank fee on a checking account in the previous year.
but struggling to pay bills between paychecks.
A debt free alternative to payday loans
PayActiv has invented a FinTech solution to provide working people an alternative to payday loans and other small-dollar loans. Every week over $100 billion is earned but remains unpaid because of inefficiencies of the economic systems. When you add to it the additional lag of one week in payroll cut-offs, the number is easily over $200 billion. This money is stuck in the system waiting to get disbursed to the millions of workers who are juggling insidious late fees and overdraft fees to get by.
PayActiv financial services solve the small dollar need for emergencies and cash droughts by providing access to these earned but unpaid wages. Helping employees avoid penalties of late payments or having to take predatory loans to overcome their crisis.
How does it work? PayActiv is offered as an employee benefit
PayActiv is offered as a voluntary benefit by employers, which means employees can enroll and use our services once it is offered as a benefit by your employer.
There is no cost to employers for offering PayActiv as a benefit to their employees.
Employer agrees to offer PayActiv as a benefit. It is a turnkey solution, no integration is needed by the employer as we leverage the existing payroll and time/attendance system. The highest security standards are followed.
Employee on-boarding uses a simple one-click method on SMS, PayActiv mobile app or web site. And all financial services are instantly available to the employees.
How PayActiv helps employees with small dollar needs?
Employees can access up to $500 of their earned but unpaid wages to manage their expenses without the fear of late fees, borrowing from friends or taking predatory loans. Employees pay $0 to $5 depending on the employer and only when funds are accessed. There is no other fee.
Funds for emergencies is only the beginning, PayActiv comes with a revolutionary allocation and savings tool to help employees plan for future, plus free financial services to pay bills online, make bank transfers, and earn rewards.
No debt and no hidden costs
A flat $0 to $5 only when funds are accessed
Multiple other financial services at no additional cost
How does PayActiv help employers?
PayActiv helps build a productive and engaged workforce. Because, when employers show they care about the real issues of their employees, they build trust and commitment with their employees. Learn more about the business savings.
How to get started
If you are an employer and interested in offering a real alternative to payday loans for your employees, we can set it up as fast as 24 hours because it does not require any changes to your HR, payroll or IT systems. Contact us to get started or get more information, we will be happy to answer your questions.
If you are an employee and find that our services would benefit you then tell your employers about it.