Payday loan alternatives springing up in Virginia

The cash advance loan business is a good one, with more than 22,000 stores scattered throughout the United States. And why shouldn’t it be profitable? Lending money at interest rates that average nearly 400% per year is a lucrative business, even if the loans are only offered $100 or $200 at a time. Many states are trying to find a way of stopping the growth of these stores, which lend money at rates that many legislators consider to be predatory. Virginia is the latest, as the state has nearly 750 stores, most of which have opened since the state legalized the short term loans in 2002.

Since that law change, Virginia has discovered what other states already knew - that the stores will spring up like mushrooms wherever a military base can be found. The reasons are simple - military personnel tend to be poorly paid and a loan to get them by until the next paycheck is always welcome. What isn’t welcome are the recurring charges that can pop up if the loans aren’t paid on time.

Coming to the rescue in Virginia are a few small credit unions that are located near some of the military bases. These unions were approached by some military officials who were wondering if they might have some alternative way of lending small amounts of money for short periods of time. After a bit of head scratching, a few have complied.

One credit union in the Hampton Roads area now issues about 100 small loans a week in the $100 to $500 range. Instead of the whopping 391% interest that a local cash advance shop might charge, the credit union offers the loans at a much more reasonable 18% per year. Borrowers who repeatedly used the loans are encouraged, but not forced, to seek credit counseling. Through this process, the credit union is trying to solve two problems at once - the high interest loans and the need for them. So far, losses have been minor and the program seems to be breaking even.

The biggest problem remains the fact that consumers seem to need short term cash, which may suggest that the public at large just needs some good old fashioned education about money management. While everyone gets into a cash crunch every now and again, the cash advance industry seems to spawn endless stories of customers who came in for a single loan of $200 or so and ended up paying back $1000 while juggling two, three or four such advances in order to use one to pay back another. These sorts of horror stories are what has led legislatures throughout the United States to try to more effectively regulate this industry, which always seems to find ways to circumvent any and all attempts to clamp down upon it.

In the meantime, a few small credit unions in Virginia are leading the way with their new lending products. We hope that other institutions in other states will start doing the same. Banks can lead the way in stopping these high interest lenders.

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