Webmaster Note: Michael Rowett serves as the Chairman of Arkansans Against Abusive Payday Lending (AAAPL) on behalf of Southern Good Faith Fund, an affiliate of Southern Bancorp.
Payday loans often create more problems than they solve.
Banks, credit unions offer alternatives for tapping quick cash.
Credit counselors can rearrange finances to free up money.
The recession drags on, and many consumers facing financial emergencies are looking for quick cash. For years, payday lending — in which borrowers get small loans to tide them over until the next payday — has been a popular option.
Currently, there are about 22,000 storefront payday loan stores nationwide, according to the Consumer Federation of America in Washington, D.C. On average, the industry makes $40 billion in loans and collects $6 billion in finance charges from borrowers each year.
But taking out a payday loan isn’t necessarily a smart financial move for the borrower.
“A payday loan doesn’t solve a financial crisis; it creates one,” says Uriah King, senior policy associate at the Center for Responsible Lending in Durham, N.C. “The typical payday borrower ends up in a debt trap because they have to go back and get another payday loan to help repay the first one, then another, then another.”
As the payday lending industry becomes more tightly regulated and industry opponents publicize its shortcomings, consumers may wonder what alternative options are available.
Fortunately, there are other ways to get quick cash.
Credit union loans
Credit union leaders almost always live and work in the same communities they serve, so they were among some of the first financial executives to see the need for payday loan alternatives.
In 2001, the North Carolina State Employees’ Credit Union launched its Salary Advance Loan program — known as SALO — which offers no-fee loans with a 12 percent interest rate.
Credit union members can borrow up to $500 per month, to be repaid monthly with funds from their next paycheck. Each of these loans is connected to a SALO cash account, which automatically deducts 5 percent of the loan and places it in a savings account to create a “rainy day fund” for the borrower.
In 2005, Prospera Credit Union in Appleton, Wis., launched GoodMoney, a nonprofit alternative to fast-cash lending. A collaboration between Prospera and the local branch of Goodwill Industries International, the program offers payday loans and other financial products with affordable rates to people facing financial challenges.
It also provides access to Goodwill’s Financial Information & Service Center, where financial workshops, money and budget counseling, and debt management plans are offered to help people better understand and manage money.
“It’s in the DNA of credit unions to promote thrift; they exploded in growth during the Great Depression, when Americans had lost their trust in banks and Wall Street,” says Mark Meyer, CEO of Filene Research Institute, a Madison, Wis.-based think tank focused on consumer finance issues. “Credit unions are nonprofit organizations and there’s a genuine interest in helping people eliminate the need for short-term loans.”
The Credit Union National Association’s search tool can help you find a credit union in your area. Not every credit union offers short-term loan programs, but many do. So call to find out the options.
Before taking out a loan, “understand the dollar amount you’ll have to pay back for that short-term loan, and what the interest rate looks like annually,” Meyer says.
Small bank loans
Banks also are beginning to offer lower-cost alternatives to payday loans. In early 2008, the Federal Deposit Insurance Corp., or FDIC, launched its Small-Dollar Loan Pilot Program, a two-year case study designed to illustrate how banks can profitably offer affordable small-dollar loans as an alternative to high-cost financial products, such as payday loans.
The project includes 31 banks across the United States offering loan amounts of up to $1,000 with interest capped at 36 percent and payment periods that extend beyond a single paycheck cycle.
The goal of the pilot project is to identify the short-term lending practices that will work best over the long term and share that information with banks across the country, according to Luke Reynolds, chief of the FDIC’s Outreach and Program Development Section.
“We also want to encourage innovation and get banks to experiment with new products,” Reynolds says.
Citizens Union Bank in Shelbyville, Ky., is one of the banks participating in the FDIC program.
“We were seeing that many (of our customers) were going to payday lenders and paying ridiculously high interest rates and fees,” says Kimberly Davis, first vice president of marketing and product development at Citizens Union Bank. “Our bank was looking to do something to try and help people from being taken advantage of.”
While the small-dollar loans offered by banks like Citizens Union include the same relaxed credit standards as traditional payday loans, they have a lower interest rate (18 percent at Citizens Union) and no closing fees or hidden costs such as prepayment penalties, Davis says.
“Our program also requires the borrower to deposit 5 percent of their borrowings into a savings account to hopefully help them begin a savings plan,” she says. “We also provide financial education materials that our loan officers go over at account opening.”
“A payday loan doesn’t solve a financial crisis; it creates one.”A number of banks already offer small consumer loans, but they usually require the same rigorous credit scoring that accompanies larger bank loans. The difference with the loans available through the FDIC Pilot Program is that they are true alternatives to payday loans, available even to people who have poor credit.
Banks in 17 states are participating in the program, including institutions in California, Delaware, Florida, Georgia, Kansas, Kentucky, Illinois, Louisiana, Massachusetts, Minnesota, Missouri, Nebraska, North Carolina, Oklahoma, South Dakota, Texas and Wisconsin.
To find out which banks are participating in your state, visit the FDIC’s Small Dollar Loan Pilot Program Web page.
The FDIC plans to use knowledge gained through the pilot project to help other banks across the country launch similar programs.
Credit counseling help
If you need money fast, consumer credit counseling might not do much to help your immediate situation.However, speaking with a counselor can help you get your finances in order so you will be less at risk of needing a payday loan in the future.
Credit counseling services affiliated with the National Foundation for Credit Counseling offer free money management help such as budget counseling, debt management planning, and mortgage default or rent delinquency counseling.
“We work with people to develop a budget that they can manage instead of letting their situation manage them,” says Charles Deville Jr., executive director of the accredited consumer credit counseling service Family Service Agency in Little Rock, Ark. “There’s no easy fix to getting out of a bad financial situation, but we can research possible alternatives that consumers and their creditors may not be aware of. And we don’t recommend anything that won’t help a client save money.”
Deville adds that “there are a lot of bad players” in the credit counseling field who charge exorbitant fees. To find a reputable agency, visit the National Foundation for Credit Counseling or the Association of Independent Consumer Credit Counseling Agencies.
If you’re in a financial bind, there are a few other options to payday loans. They include:
Borrowing from family or friends. You may even consider offering to pay some of the money back through bartering or providing services such as cooking meals or doing yard work.
Negotiating with creditors. One of the cheapest ways to stretch cash further is to work out a payment plan with your creditors, says Michael Rowett, chairman of Arkansans Against Abusive Payday Lending, a group of 40 nonprofit, consumer and faith-based groups that helped lower legal interest rates for consumer loans to 17 percent in Arkansas. “Talk to your credit card companies, talk to your utility company and ask them if they can work with you,” he says. “Often, they will.”
Getting a cash advance from a credit card. “It’s not a great deal; your credit card may charge 25 (percent) or 30 percent interest,” Rowett says. “But it’s certainly a better deal than paying 300 (percent) to 500 percent interest on a payday loan.”