An alternative to payday loans

Payday loan sign

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Tess Vigeland: For folks in this country who live paycheck to paycheck, sometimes the only way to make ends meet is by heading to a payday lender. These storefront operations have quickly grown into a $40 billion industry.

But more often than not, payday loans come with triple digit interest rates that trap borrowers in a spiral of debt. So the federal agency that insures bank deposits, the FDIC, is asking banks to provide some competition. From WCPN in Cleveland, Mhari Saito reports.


Mhari Saito: When Jacqueline Oliver first tried payday loans, she loved how easy and convenient they were. She walked into a Cleveland payday lender with a pay stub from her county health care job and wrote a check for the amount she wanted to borrow -- $300, plus the lender's $45 fee. The check was dated for two weeks later, when her next paycheck would come in. But the lender would give her the cash up front. Soon, this 44-year-old single mom found herself in over her head.

Jacqueline Oliver: If you borrow $300, you gotta pay the fee plus the money back all at one time and it's kind of stressful, especially if you have to live the next two weeks and you're living paycheck to paycheck, like I am -- and probably a lot of other people too.

These days Oliver uses her credit union to borrow cash. On this Friday, members were lining up for "Grace Loans." Customers at Cleveland's Faith Community United Credit Union can borrow up to $800 if they have direct deposit and put $10 in their savings account. Borrowers pay 17 percent APR, or annual percentage rate. That's much lower than the 391 percent that local payday lenders charge, and they can pay it back in several payments. CEO Rita Haynes says she wanted to provide her members a better short-term loan.

Rita Haynes: Grace is unmerited favor, so they didn't merit a loan based on their credit report; they got the loan because we trusted in them that they would pay us back. We've lost very few loans.

Faith Community United is one of a small but growing number of credit unions trying to give payday lenders some competition. Now the FDIC wants more banks to jump in to the race. The FDIC's Bob Mooney says that's why the federal agency released guidelines earlier this summer for the type of payday loan they'd like banks to offer: Small, one-month loans capped at a 36 percent annual percentage rate.

Bob Mooney: Payday loan customers have one thing in common: they all have a checking account at a bank. The FDIC is encouraging banks that it supervises to offer affordable small dollar loans to these customers.

To entice banks, the FDIC is offering extra credit at exam time. Every year banks have to show they are trying to meet the federal Community Reinvestment Act by doing business in the rich and poor parts of their neighborhoods. Banks that offer small dollar loans that follow the guidelines will get "very favorable" consideration in their annual reviews.

Wayne Abernathy: As a product that you might offer to a customer once and that customer would take just once, I don't see how anybody can make that product work.

That's Wayne Abernathy of the American Bankers Association. He says these loans wouldn't make any money. The cost of putting the loan together could even be more than the amount of interest and fees it would generate. He says banks would more interested in short-term loans if they knew it would bring in potential new clients who might later move into other bank products.

Abernathy: If it is the beginning of a relationship that you're having with a customer, then maybe it can be part of a solution.

But critics say banks are just trying to protect service fees and products like overdraft protection -- it's a two to four week loan that covers a customer's bounced check. The interest rates and fees can add up to triple digit rates that rival payday lenders. In Jacqueline Oliver's case, she kept bouncing checks written to her payday lender and had to pay those bank fees too.

Oliver: You want to pay it back and then sometimes, you don't have it because something comes up like maybe your light bill or something and you need to pay it and you're gonna pay your bills first, so you may come up short on the other loan. That's pretty much how I got behind.

At first, Oliver was scared to turn to the credit union because she'd had such a bad experience with her last bank. When she did, her history didn't count.

Oliver: When I borrowed from here, they didn't hold it against me because I had borrowed from the other place and it helped me to pay off the other loan.

Cleveland's Faith Community United Credit Union has not made money off of their "Grace Loan." Still, the credit union's CEO Rita Haynes says the loan is so popular that they haven't lost money.

In Cleveland, I'm Mhari Saito for Marketplace Money.

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