“In addition to enacting consumer protections for the payday loan industry, increasing the number of lenders competing to provide affordable short-term loans is critical to driving down the cost of credit,” said Williams.

As part of this strategy, Woodstock Institute conducted an 18-month evaluation of the short-term loan products offered by six credit unions participating in a joint program offered by the National Federation of Community Development Credit Unions and JP Morgan Chase.

Unlike traditional payday lenders, which charge triple-digit interest rates for short-term loans and structure them in a way that makes it difficult for borrowers to meet anything more than the minimum interest payment, these credit union-based loans are lower in cost and offer a number of asset building components.

Many of the loan products required the borrower to deposit a portion of the periodic loan payment into a savings account to help build a cushion against future financial instability. The credit unions also worked to develop long-term relationships with borrowers, having learned that longer-term members had considerably better repayment records than new members.

Several credit unions also used the credit reports of new borrowers to educate their members and help them identify any errors on the report. These and other steps created a product that was also sustainable in the long term for the participating credit union.

“Adopting consumer protections to prevent over-borrowing and encouraging or requiring financial education contribute strongly to the success of the product,” said Williams.