Alternative helps people avoid payday loan rates

Lisa Johnston | lisajohnston@archstl.org
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A recent customer of the nonprofit RedDough Money Center was in desperate need of a loan for a car repair — necessary for transportation to her job.

The repair bill was $465, and she received the money on the spot, paying it back over a six-month period. She'll pay $60 in interest over the time frame, a fraction of what she would have paid through a payday loan at a triple-digit interest rate.

RedDough, which opened in March thanks to a grant, is a nonprofit alternative to payday lending and check-cashing services with a lower-cost option. Among the products it offers is an installment loan in which people borrow up to $500, repaying it over four to six months at a 36 percent rate with no prepayment penalties or hidden fees.

Earlier this month, the Consumer Financial Protection Bureau proposed a new rule
on payday, car title and installment loans, setting off a 90-day comment period.

In more than 30 states, payday lending companies charge interest rates of 300 percent or more, trapping families in spirals of debt. A typical payday loan in Missouri costs roughly $18 per $100 borrowed for 14 days — an interest rate of 469.28 percent.

Among those who have fought for changes are the Society of St. Vincent de Paul and Metropolitan Congregations United, which includes several Catholic parishes in St. Louis.

According to the Missouri Catholic Conference, Pope Francis calls for all people to hear the cry of the poor and to reform "unjust social structures" that deny the poor basic necessities and opportunities for social and economic advancement. The bishops' public policy arm supports stronger consumer protections in the lending industry as a means of building vibrant and just communities that serve the common good.

The U.S. Catholic Conference states that payday loans appear to be, and are marketed, as simple and straightforward: a consumer has a need for an immediate source of money before the next paycheck. Using that paycheck as a form of collateral, that person receives a short-term loan. When the person receives his or her paycheck, he or she pays back the loan, plus fees and interest.

"In most instances, however, payday loans are made in a way that make it almost impossible for borrowers to repay in the required time frame, requiring them to take on more debt," states a Catholic Conference background report on predatory banking and payday lending. "The typical borrower is in payday loan debt for seven months out of the year. She 'rolls over' a loan an average of eight times and pays an interest rate of about 400 percent."

A Pew Charitable Trusts report in 2013 found that 58 percent of payday loan borrowers have trouble meeting monthly expenses at least half the time. Only 14 percent of borrowers can afford enough out of their monthly budgets to repay an average payday loan. More than a quarter report that overdrafts occurred as a result of a payday lender making a withdrawal from their account.

RedDough, in a strip mall at 6724 Page Ave., is owned and operated by Prosperity Connection, whose mission is to help the low- and moderate-income community gain economic independence. Red Dough refers lenders to Prosperity's Excel Center next door for free one-on-one financial coaching and housing, employment, legal, health care and other services. It also has a partnership with St. Louis Community Credit Union, and it works with Beyond Housing, the Fatherhood Support Center and other groups.

"The whole idea is to help people get out of payday lending and to give them a more affordable and consumer-friendly option," RedDough president Michael O'Brien said.

Criteria for a loan includes ensuring that borrower' monthly payments are no more than 5 percent of their monthly gross income. Other services such as check cashing, money transfers and bill pay are offered.

According to David Gerth of Metropolitan Congregations United, it's important for the Consumer Financial Protection Bureau to hear from people affected by the loan industry and about the need to examine the businesses. What can be worse than a 400 percent interest rate on a loan for a person trying to pay a gas bill, he asked.

The Pew Charitable Trusts warns that the proposed new rule lacks clear product safety standards, makes it too easy for payday lenders to continue making harmful loans and fails to encourage banks and credit unions to enter the market and make lower-cost loans. Two essential safeguards needed in the new rule, it states, are limiting each installment loan payment to 5 percent of a borrower's paycheck and giving borrowers up to six months to repay. 

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