Payday Loan Alternatives

My experience with a payday loan was mine
was an installment loan, which meant that I was paying $130 every two weeks. Every time
I got paid, I had to make a payment. Payday lending is a method of borrowing in
which you can get money very quickly, but at a very exorbitant interest rate. So we
are not talking interest rates of 25%. We are talking interest and fees that equate
to 200-300% or more, and what makes that an issue in Michigan right now is they really
prey upon people who can least afford to pay it. So if something happens, you get a flat tire,
or your refrigerator goes out, you need some extra money and your credit score isn’t
going to support a loan. You don’t have anything saved. What are you going to do?
The only opportunity they have is to go to a payday lender. It’s beyond dangerous. It’s… for many
people it just keeps them in poverty long term. What I borrowed was $800. Two years later,
I still had $800 that I owed on that loan. And I was paying $260 a month. The cap on a payday loan is $600, so they
should not be loaning anyone more than $600 on a payday loan event. But beyond that, it
is illegal for anyone to have been issued more than two payday loans in the state of
Michigan at any time that are still open and active. Back in October, we really wanted to dig into
this issue and see what we were seeing with our clients. And so what we found was that
we had 48 people who had these loans, but 61 loans total. Three of the forty-eight had
three loans or more. We expected that there would be no loans in the system that were
over $600, plus the fee of up to $76 that they can charge. So we expected to see a lot
of $676’s and below. And we did to some extent. So the first were $676 or below. But
the other 20 were more than that. And there were some in here that were in the thousands.
So we had 2 loans that were for $2,000 each, and one that was for $8,000. And these are
all from payday lending institutions. So what’s interesting about that is we know
that’s illegal in Michigan! How is this even happening, how are they getting away
with this, and certainly how are these three clients getting a third loan when the other
two are still open and active? And what we’re learning is that there’s a lot of ways that
payday lending companies try to get around this., and one of them is to be virtual. The company that I took the loan out of was
from another state. They were charging even more because it wasn’t even a Michigan based
company and they could get away with it. It’s horrendous the way people are preyed upon
with these types of things. There’s just no way to get out of it. We wanted to help them get out of that at
a lesser interest rate because what they were paying was not… there was no way out of
that. This is a pilot program. We’ve provided
49 loans to families who were either involved in a payday loan or were contemplating getting
a payday loan as a result of their personal financial situation. The only way that we can’t work with a family
is if there’s an inability to repay the loan. But what we can do is work with them
to determine how to increase their income. We have everybody come through financial education,
financial coaching individually. And then we assist them to get to the point where they
can qualify. For ICCF, we see this as a critical component
in our mission to promote family responsibility and independence, freedom from that debt trap
that is so prevalent with payday loans. You know, in terms of the payday lender, they’ll
kind of start going through a cycle where they’ll take out another payday loan to
pay off the first one and it really snowballs. With out loan program, it really is the opposite
of that. It’s a fixed term rate loan. They pay it off, and then because of the Savings
for Success program, they’re walking off with $240-$520 in a savings account. The loan program really originated out of
a conversation at one of our Lakeshore Employee Resource Network meetings. Each of the companies
was discussing as we were coming out of the economic downturn the number of 401k loans
that they were being requested from employees, or employees coming in for hardship purposes
because of payday lending, transportation, or utility issues. Instead of an employer
trying to create an internal program, we decided to partner with a credit union locally. It’s the Bridge Loan and Savings plan, and
it’s designed to help individuals who maybe have damaged credit or have a life circumstance
that comes up where they need access to reputable lending – to help them keep going to work,
so it’s not interrupting their ability to get to work. A mom was out on maternity leave. The maternity
leave got a little bit extended. During that time period, she’d gotten behind on some
utility bills. I said, “We could explore a loan,” and her response was, “No we
can’t!” We talked about our Bridge Loan program and
she was like, “I don’t think you understand. My credit is so bad that I won’t be able
to get this.” And I had told her that we didn’t look at credit, and it just did not
connect with her. A loan was not part of her vocabulary. And I said, “Really? Because
you’ve been here multiple years with this company and you’ve got a good reputation
here. That will serve in lieu of your credit score.” It requires that they sit down with a success
coach and look at the affordability of the loan as opposed to just giving a loan without
looking at the ability to pay it back. The loan that we provide has a savings element.
If your payment is $25 every two weeks, $10 is required as added to that amount. That
$10 goes into a savings account. It’s frozen. It cannot be accessed until the loan is paid
off. We’ve found that most people actually continue
to save after the loan is paid off. We have members who started back in that early
2012 who now have several thousand dollars in savings. And these were first time savers.
So there’s just this huge reward in seeing people realize that, “Wow. I can save money.” And so each of the ERNs that we have – there
are eight in the state right now – they all have a loan component in partnership with
a local credit union or community bank. So we’re a community development credit
union. The people that we try to serve are the ones that are a little bit more disenfranchised.
About 75% of our members have less than $500 on deposit with us, total savings relationship. We came up with this product called MyPay
Today, which is an alternative to payday lenders. It costs about 80% less than if you were doing
those same transactions at a Check N’ Go. So it’s a remarkable savings. It’s like
$600-$700 per person per year. So we have an annual fee – sort of like
a credit card has an annual fee – of $70, and then 18% after that. The way it’s designed
is you come in, you get your $500, and then instead of having to pay it back on your next
pay day (which is less than two weeks) you have two months to pay it back. We also report
it to credit bureaus. So while you’re paying your loan back, you’re also improving your
credit score. We did a study on our sustainability. Our
loss ratio on this product is 15%. So if you’re looking at the rate that we charge, which
is 18%, that’s only a spread of 3%, which really isn’t sustainable all by itself.
And that’s where the annual fee comes in, and that helps us to pay for everything else
that goes along. In the end, it is sustainable. But, again, we don’t make that much. For us, it was worth it because it’s very
popular with our members. There are credit union products that are being
developed that will be alternatives to payday lending. There aren’t a lot of them though. If you have found yourself in a position where
you have one of these predatory products, we really do want to help. And that’s what
the Financial Empowerment Center is here for. We area a partnership with the City of Lansing
city government and Capital Area Community Services, which is your local community action
agency. We are a free service. We absolutely never charge for anything. It’s very safe,
confidential, professional, and you can come in and talk with one of our counselors about
this issue or any other issues you’re having with your finances.

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