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.)