Andy Posner founded the Capital good fund in Rhode Island just before the last recession, and he says he saw firsthand how the much-touted economic recovery after 2008 left many people behind.
More and more people, even those who work full-time or more, have been unable to make ends meet over the past decade. So they turned to payday and car loans, pawnshops, and other quick cash options when hit by an emergency expense or just a higher-than-usual utility bill.
“The predatory lending market has more than doubled in size during the boom and the stock market boom,” he said. “So it’s clear it didn’t thrive in equal measure.”
Capital Good Fund is a clearly non-predatory lender, Community Development Financial Institution which offers small personal loans on reasonable terms. The fund now provides loans and financial advice in six states. Texel is the newest.
The fund offers two different types of loans in the Lone Star State: one to cover immigration costs between $2,000 and $20,000 at an annual rate close to that of a typical credit card (15.99% to 24%). The other is a short-term crisis relief loan between $300 and $1,500 with a 5% interest rate and a three-month grace period.
Posner says the coronavirus crisis has pushed many people to just get by and need a little help making ends meet. The short-term loan is most commonly used for rent, utilities, Wi-Fi bills, and car repairs.
“A lot of people buy iPads and the like because their kids are now going to school through Zoom,” he said.
Without an alternative like these cheap loans, Posner said most of his customers would eventually take out a payday or car loan and borrow at rates and terms considered predatory.
Texas has more than 1,900 stores selling payday and car loans, surpassing the number of Whatabers and Starbucks in the state.
Officially, payday and auto loans all have an interest rate of less than 10% in Texas — the state constitution prohibits rates that exceed that as usury — but with all the fees imposed on payday loans, it’s like taking out a loan with a interest of 500%. That’s 100 times what Capital Good Fund charges for a small loan.
Payday loans are also often structured to be difficult to pay off, forcing many borrowers to take out another payday loan to pay off the first and start a debt spiral that critics say is fundamental to the profitability of this business. businesses.
Car title loans are cheaper than Texas payday loans — starting around 200% APR — but they’re risky because the title of a car or truck is used as collateral. Last year, more than one in six Texans taking out a title loan had their cars repossessed when they couldn’t repay the loan, according to data from the Texas Officer of the Consumer Credit Commissioner.
Cities across Texas have tried to curb the more predatory lending practices by demanding fairer loan terms or better disclosures. A growing list of states has limited interest rates and fees, but Texas offers almost no consumer protections, allowing the industry to thrive.
Last year, Texans paid more than $2 billion in fees for payday and auto loans.
“We see our role as part of disproving that if you curb predatory lending, people have nowhere to go because we are one of the alternatives,” Posner said.
Susan Hoff, the chief strategy and impact officer for the United Way of Metropolitan Dallas, said more regulations are needed to contain the industry’s excesses, but there must be better options for people who need to borrow money for a crisis. or a chance.
“To have a viable alternative with a fair and reasonable interest rate that people can repay is an incredible opportunity for our community,” Hoff said.
United Way of Metropolitan Dallas helped bring Capital Good Fund to Texas.
Because too many workers earn too little to make ends meet, Hoff meets a need, according to Hoff. Her organization’s survey found that only a quarter of 24- to 35-year-old workers in the Dallas area earn a living wage.
“People who use predatory lenders don’t do that very often, just for a crisis, it’s often eight to ten times a year, just going back to get enough money to get through another month, and then back again, and so “Recomposing those loans (and) that interest is exaggerated,” she said.
Capital Good Fund has made approximately 5,900 loans over the past 11 years, lending approximately $12.3 million.
The fund’s loans are also intended to help people improve their creditworthiness. Because loan payments are reported to the credit bureaus, the average customer sees a 90-point increase in credit scores by the time their loans are repaid.
Because payday and automatic title lenders usually only report missed payments to credit bureaus, “you can’t win, but you can lose.”
Posner said he’d be happy to offer a better alternative, but he says in an economy that was working well, his fund probably wouldn’t exist.
“No healthy economy should require people to borrow $300 to $500,” he said. “They have to make enough money, there has to be enough affordable housing, there have to be upward mobile jobs so that people have that liquidity. It’s no fault of our customers that they don’t. It’s a system error.”
Do you have a tip? Christopher Connelly is KERA’s One Crisis Away Reporter, exploring life on the financial edge. Send an email to Christopher email@example.com.You can follow Christopher on Twitter @hithisischris.
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