smart spending

4 alternatives to payday lending

Citizens Union Bank in Shelbyville, Ky., is one of the banks participating in the FDIC program.

"We were seeing that many (of our customers) were going to payday lenders and paying ridiculously high interest rates and fees," says Kimberly Davis, first vice president of marketing and product development at Citizens Union Bank. "Our bank was looking to do something to try and help people from being taken advantage of."

While the small-dollar loans offered by banks like Citizens Union include the same relaxed credit standards as traditional payday loans, they have a lower interest rate (18 percent at Citizens Union) and no closing fees or hidden costs such as prepayment penalties, Davis says.

"Our program also requires the borrower to deposit 5 percent of their borrowings into a savings account to hopefully help them begin a savings plan," she says. "We also provide financial education materials that our loan officers go over at account opening."

“A payday loan doesn't solve a financial crisis; it creates one.”

A number of banks already offer small consumer loans, but they usually require the same rigorous credit scoring that accompanies larger bank loans. The difference with the loans available through the FDIC Pilot Program is that they are true alternatives to payday loans, available even to people who have poor credit.

Banks in 17 states are participating in the program, including institutions in California, Delaware, Florida, Georgia, Kansas, Kentucky, Illinois, Louisiana, Massachusetts, Minnesota, Missouri, Nebraska, North Carolina, Oklahoma, South Dakota, Texas and Wisconsin.

To find out which banks are participating in your state, visit the FDIC's Small Dollar Loan Pilot Program Web page.

The FDIC plans to use knowledge gained through the pilot project to help other banks across the country launch similar programs.

Credit counseling help

If you need money fast, consumer credit counseling might not do much to help your immediate situation.

However, speaking with a counselor can help you get your finances in order so you will be less at risk of needing a payday loan in the future.

Credit counseling services affiliated with the National Foundation for Credit Counseling offer free money management help such as budget counseling, debt management planning, and mortgage default or rent delinquency counseling.

"We work with people to develop a budget that they can manage instead of letting their situation manage them," says Charles Deville Jr., executive director of the accredited consumer credit counseling service Family Service Agency in Little Rock, Ark. "There's no easy fix to getting out of a bad financial situation, but we can research possible alternatives that consumers and their creditors may not be aware of. And we don't recommend anything that won't help a client save money."

Deville adds that "there are a lot of bad players" in the credit counseling field who charge exorbitant fees. To find a reputable agency, visit the National Foundation for Credit Counseling or the Association of Independent Consumer Credit Counseling Agencies.

Other options

If you're in a financial bind, there are a few other options to payday loans. They include:
  • Borrowing from family or friends. You may even consider offering to pay some of the money back through bartering or providing services such as cooking meals or doing yard work.
  • Negotiating with creditors. One of the cheapest ways to stretch cash further is to work out a payment plan with your creditors, says Michael Rowett, chairman of Arkansans Against Abusive Payday Lending, a group of 40 nonprofit, consumer and faith-based groups that helped lower legal interest rates for consumer loans to 17 percent in Arkansas. "Talk to your credit card companies, talk to your utility company and ask them if they can work with you," he says. "Often, they will."
  • Getting a cash advance from a credit card. "It's not a great deal; your credit card may charge 25 (percent) or 30 percent interest," Rowett says. "But it's certainly a better deal than paying 300 (percent) to 500 percent interest on a payday loan."

 

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