A Positive Alternative to Payday Lenders

mccarthy

Thanks to the Methodist Church, Nina McCarthy found an alternative to expensive payday lenders to pay off her debt. Photo credit: Washington Post.

by James A. Bacon

It’s understandable that people get upset with payday loan companies. The short-term lenders, who use borrowers’ paychecks as collateral, charge interest rates that seem extortionate on an annualized basis. Many borrowers get caught on a treadmill of indebtedness, taking out new loans to pay off the old ones.

The problem with most consumer activists is that they focus primarily on shutting down payday lenders. But driving small-loan providers out of the market doesn’t do anything to help working-class people desperate for cash — it simply eliminates one of the few options available to them.

That’s why it’s encouraging to see churches stepping in with their own lending programs. In an article today, the Washington Post describes how the United Methodist Church in Richmond has created the Jubilee Assistance Fund, which uses church funds as collateral for parishioners to take out low-interest loans through the Virginia United Methodist Credit Union. Over 7 1/2 years, the program has helped parishioners secure 14 loans, from $500 to $8,800. Writes the Post:

Similar initiatives run by faith-based organizations across the country are shifting the way churches approach charity. These programs offer parishioners an alternative to commercial lending agencies, which often charge triple-digit annualized interest rates.

Unlike commercial lenders or even other nonprofit alternatives, these church-backed programs offer near-zero interest rates – a model, proponents say, that helps struggling borrowers get back on their feet.

This is a positive response, not a negative one, to the demand for small, short-term debt. Church programs provide poor people with more options — and better ones — than they had before, rather than taking options away.

Creating “jubilee” programs is consistent with Old Testament theology of loan forgiveness, and it plays to the natural strength of churches, which are communities of parishioners who support one another in times of need. As members of the community, borrowers arguably are more highly motivated to repay their debt. Accordingly, I would expect church lenders to enjoy lower default rates. Also, churches probably have a lot less paperwork and administrative overhead than payday lenders do. It will be interesting to see, though, if churches can achieve a scale that can help thousands, rather than dozens, of people in need.

(As an aside, please contrast the Methodist Church’s approach to economic insecurity to that of the village radicals disrupting Richmond City Council, described in the previous post. One actually helps people; the other just raises hell.)

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7 responses to “A Positive Alternative to Payday Lenders

  1. well .. Churches are simply not in the loan business – for the public. They may help those who have some connection to the church but they’re not going to set up a loan operation that serves all comers.. and you forget where the money comes from to start with. Parishioners tend to have ownership in the money they give the Church to do “good deeds”.

    there is also a issue of priorities. Does a church use money to run a food bank or do they provide loans? there is never enough money to do meet all needs and the question is -who handles the “gap”?

  2. It’s my recollection that many financial institutions, such as “building and loan” and credit unions had their start with immigrant communities lending to their members as most banks would not extend credit. I understand that a number of immigrant communities continue this practice today. It seems like a good development and, over time, should result in the establishment of more businesses. Of course, all applicants will not get loans. And my guess is the “gap” is usually not bridged.

    • it’s not just payday loans, it’s also check-cashing services.

      so my question is why do people need check cashing services?

      I think the answer to that question might be interesting… on several levels.

      oh.. and up my way -we also have car title services…

      how many people do you know – seriously -that have to go get a loan on their car?

      • People need cash cashing services because they don’t have a bank account. They may not trust banks; not have enough money to start an account; cannot afford to tie up their money in a bank account; may not have sufficient and valid ID to open an account; etc.

        • re: ” The short-term lenders, who use borrowers’ paychecks as collateral, charge interest rates that seem extortionate on an annualized basis. Many borrowers get caught on a treadmill of indebtedness, taking out new loans to pay off the old ones.”

          just like those who put themselves in credit card hell? or kids with govt loans for college and the govt also does not regulate?

          ” The problem with most consumer activists is that they focus primarily on shutting down payday lenders. But driving small-loan providers out of the market doesn’t do anything to help working-class people desperate for cash — it simply eliminates one of the few options available to them.”

          is that true? They want regulation – equivalent to the kind of regulation we see for credit cards and other financial services used by those who at operating at a higher economic level. How is that the same as putting them out of business?

          The “put them out of business” rhetoric seems to be, instead, an assertion that if the activity is regulated – the regulation will drive them out of business and that kind of business will no longer exist and become a loss to the people who need the service.

          But we don’t seem to have the same view when it comes to financial services to people of higher economic station.

          when it comes to the poor – regulation of services is said to be undesirable – i.e. it’s better for the poor to have predator businesses to serve their needs rather than no services at all OR that “charity” is a kind of competition that could accomplish better – what regulation might not.

          well.. I don’t see folks saying that Churches should issue credit cards with more reasonable interest rates – as a better approach.

          or that Churches run schools for returning Vets so they don’t lose their education benefits to shyster diploma mills.

          or than Churches would an alternative to the govt requiring companies to insure those with pre-existing conditions.

          so there appears to be a bit of double standard – where those not on the economic margins do, in fact, “deserve” protection via govt regulation but those on the margins don’t – because it could “hurt” them.

          some of us would actually think exactly the opposite.

          that more protective regulation is needed for those who are not sophisticated consumers of financial services …because they are much more vulnerable as well as economically fragile.. i.e. need every penny they can get – and having those pennies grabbed away from them by for-profit companies who basically benefit from those who are in those economic circumstances…

          so we can stand for the poor to pay 25-50% interest on a loan but it’s unacceptable for those in better economic circumstances?

  3. What the church is doing is essentially microcredit (http://en.wikipedia.org/wiki/Microcredit) on a very localized scale. I would argue that payday lenders are essentially rent seekers who take advantage of socioeconomic inequalities to make a profit and deserve to be regulated out of business, even if that would be “negative response.”

    That said, it would be nice to see the government step up and provide locations (which is where payday loan places really have an advantage). It would really be nothing to bring back some variation of the postal banking service that specializes in no-collateral, low interest loans. Even if they partner with local/regional credit unions to do it.

  4. This is a good piece, which I agree with. There has been a repeated overemphasis on regulations that have no proven benefits for the people that use these loans. You can’t legislate people out of debt.

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