Payday Lending Alternatives
Payday lending – when a person uses their paycheck as collateral for a short-term loan - is a controversial financing tool that is commonly perceived as predatory. The high interest rates and short time for repayment often required by typical payday lending companies are where many of the problems surface. These demanding terms of service are a particular concern for cash-strapped low-income communities.
By missing just one payment, a resident could start to get trapped under an ever-increasing mountain of debt, compromising their financial security, and in turn, the economic health of an entire community.
Data compiled by the Center for Responsible Lending indicates that annual interest rates for payday loans are between 391 and 521 percent. The numbers also show that loans generate around 3.5 billion in fees, and that most are made to people caught in debt cycles, where unpaid interest and fees build-up and are carried from paycheck-to-paycheck (The Payday Lending in America series by The PEW Charitable Trusts reveals similar patterns).
These concerns have motivated some mission-driven institutions to develop payday lending alternatives that carry less risk. Organizations receiving some attention for their efforts in this space include religious institutions: Consider the Jubilee Assistance Fund (JAF) featured in a recent Washington Post article.
Some NeighborWorks member organizations have also come up with alternative lending instruments. In the spirit of knowledge-sharing, we wanted to present the work being done by two of them: the Community Development Corporation (CDC) of Brownsville and the Neighborhood Housing Services (NHS) of Baltimore.
CDC of Brownsville
CDC Brownsville works in neighborhoods in the Rio Grande Valley of Texas. Concerned with the negative impact payday lenders were having on the financial health of their residents, Brownsville established the Community Loan Center (CLC), a short-term financing program with rates, fees, and repayment timelines that are much less onerous than their profit-driven counterparts.
For a modest $20 start-up fee, borrowers can take out loans of between $400 and $1,000, which can be paid off over a twelve month span at 18 percent interest, rather than being due in full on a monthly or bi-monthly basis. They never let people borrow more than half their gross income, offer free financial counseling, do not require credit histories or collateral, and the loan center is repaid directly by the borrower’s employer.
NHS of Baltimore
NHS of Baltimore’s portfolio of services includes the “small dollar” loan program. This is a short-term financing tool that provides loans of up to $3000 for eligible recipients. The interest rates are between 7.99 and 8.5 percent, and borrowers are given between one and three years to repay the loan. To be eligible, participants must have at least one year of steady employment, and there are some credit requirements.
Instead of steering residents away from payday lending instruments, organizations like Brownsville and NHS Baltimore decided to meet the demand for these products by designing their own short-term loan portfolios that prioritize safety and affordability for the low-income communities they serve.
Are traditional payday lending operations a problem in your community? What do you think of the Community Loan Center (CLC) and “Small Dollar” loan program?
Click here to read a recent blog on the Brownsville project by the National Alliance of Community Economic Development Associations (NACEDA) !