Payday loans provide relief for a very immediate need for cash, but this relief comes at the cost of triple digit interest rates and exorbitant fees. According to the Pew Charitable Trusts, about 12 million people in the United States take out payday loans. Furthermore, borrowers who cannot afford to repay loans within two weeks are often forced to take out more loans to cover existing ones.
Borrowers incur even more fees and get trapped in a downward cycle of debt.To help members use lower-cost payday alternatives, we partnered with Credit Human Federal Credit Union (Credit Human), a credit union in San Antonio, Texas. Credit Human developed QMoney, a low-fee, low interest rate payday alternative that offers members money “on the spot.” Members can go online and request a loan for up to $500 at any time without a credit check.
Funds are deposited into their checking account within 60 seconds of approval. Unlike a payday loan, members cannot take out another Q-Money loan until they have paid off the existing QMoney loan.
Credit Human developed QMoney after they learned that members (and even credit union employees!) were using local and online payday lenders for their short-term cash needs. For example, in a ﬁve-month period in 2015, members made over 703 payment transactions for $1.4 million dollars by ACH to traditional payday lenders.
Behavioral Diagnosis and Key Insights
QMoney was designed to meet the members’ immediate need for money (without creating longer-term problems) and to be ﬁnancially viable for the credit union. In order to offer lower interest rates and lower fees, Credit Human needs high uptake and repayment rates. We are working with Credit Human on an intervention focused on increasing uptake rates. We also launched an experiment aimed at increasing repayment rates among members who could beneﬁt from the loan. We are working with Credit Human on an intervention focused on increasing uptake rates. We also launched an experiment aimed at increasing repayment rates.
Through our research, we realized that in order to increase on-time payments we needed to:
- Prompt members to think about when they will have money to make the next loan Despite good intentions, many people often fail to follow through on important plans such as taking medication, exercising, voting, and paying loans on time. There is an increasing amount of evidence showing that prompting people to make speciﬁc plans makes them more likely to follow through.
For this reason, we decided that shortly after a member takes out a loan, we would prompt them to plan their payment by thinking about when they have money available to make the next loan payment.
- Encourage members to make payments as soon as funds are available (instead of waiting for the deadline). From a purely rational economic perspective, members should wait until the loan is due to pay it. From a behavioral perspective, however, members might be better served by making a loan payment when they have funds available – so as to avoid the temptation of spending the money elsewhere or risk forgetting to make the payment on the due date. For this reason, we reminded members that partial payment was an We also offered details about how to make a partial payment.
Members who took out a QMoney loan were randomly assigned to a control or experimental condition. In the experimental condition members got a “plan your payment” email a few days after the loan was taken out (see ﬁgure below). Members in the control condition did not get a “plan your payment” email. In both conditions, however, members get a payment reminder. The payment reminder was sent three days before the one-month and two-month payment deadlines.
Our experiment is still in the ﬁeld and will be running until 2019. In the ﬁrst ﬁve months of the experiment, 400 members had taken out a QMoney loan. We will be measuring repayment rates across both conditions and will share results in 2019.