Quick cash loan stores are not the only source of short term cash

The payday loan industry is thriving. The reasons are many, but the bottom line is this - there are many people in this country who simply cannot always make it from paycheck to paycheck and who need the occasional short term loan to tide them over. This need has been met by the explosive growth of the payday loan industry, which now has more stores in the United States than McDonald’s and Burger King restaurants combined. This success comes despite astonishingly high fees that can run anywhere from 300-1000% when viewed on an annual basis.

The loans, of course, are typically two weeks in duration, which the proponents say makes the annual interest rates irrelevant. Furthermore, they even point out that the money paid for the loans are fees, rather than interest. Regardless of what you call it, paying $15 to borrow $100 for two weeks is a lot of money, and there are those who are determined to do something about it.

A credit union in the Akron, Ohio area has come up with a plan to offer its members alternative lending after a survey showed that at least 70% of members had taken out a payday loan at least once. The plan requires a $35 annual fee and a $15 fee for each loan, with a limit of twelve loans per year. There is a $500 cap on the loans, which are repaid when the member’s next paycheck is deposited. There is no expectation that the plan will earn money for the credit union, but rather that it will wean the members from their need to use the high interest stores when they need extra cash.

The problem isn’t so much that these products are expensive in and of themselves; it’s that the borrowers often cannot pay them back in time. This, in turn, leads to the borrower either taking out another advance or renewing, or “rolling over” the existing one by paying the fee a second time. The ugly result of this process is that people can end up owing thousands of dollars in interest when they only borrowed hundreds of dollars in the first place. It’s an unpleasant cycle that tends to repeat and in its worst scenarios, people can find themselves juggling ten or fifteen advances at once.

What this credit union in Ohio, as well as other in Virginia are doing, is offering an alternative to quick cash lending which provide the same basic service, a short term lending of a small amount of cash, without the risks associated with borrowing at usurious interest rates. We hope to see more financial institutions take on this role as it would help the poorest people in our society break out of a cycle of debt that can be hard to eliminate. The reason that we probably will not see more financial institutions introducing such lending is that it is not particularly profitable. Time will tell.

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