Sarah Gardner: We've talked a lot on Marketplace about the credit crunch and how hard it can be for middle-class borrowers to get a loan right now. Well, for the poor, the credit gap is even wider and harder to cross. Sometimes they end up going to payday lenders, who charge exorbitant interest rates.
But now there's an alternative lender on the scene, that caters to Hispanics. Marketplace's Jeff Tyler found it in San Jose, Calif.
Jeff Tyler: We’re close to Silicon Valley, where entrepreneurs play with millions of dollars in venture capital. But around here, a loan of even a thousand dollars is hard to come by. Many Hispanics have not traditionally felt welcome at banks. So they haven’t established the credit history needed to get a loan. A company called Progreso Financiero fills that gap.
At this nondescript one-room office in a shopping center, a soft-spoken man asks about a loan. The loan officer tells him to come back with a valid ID, a utility bill and recent pay stubs. Progreso Financiero has developed its own system to analyze the risk of borrowers who don’t have a formal credit history. People like Jose Arellano.
Jose Arellano: I went to one bank and tried to get credit. But they didn’t accept me for a loan. So, I came to Progreso Financiero, and they accepted me.
Arellano paid off his $900 loan. Then he borrowed again. Both times, he invested the money in his business cleaning houses. Before he took out his first loan, he says:
Arellano: We had only 100 customers. And after I get the loan here, I just make my advertising. That helped me to increase my business 400 percent.
The loans also helped Arellano build his credit rating. He says he may shop around for a better deal on his next loan. That doesn’t bother the CEO of Progreso Financiero, Raul Vazquez.
Raul Vazquez: A good outcome for us can be that a customer builds a good credit history with us, and then over time, goes and works with a different financial institution. And then gets access to products at lower costs to them.
This isn’t a charity. The company is in business to make money. At the same time, Progreso Financiero has a strong social commitment. It helps the Hispanic community meet short-term financial needs, and establish a foothold for future credit.
The company operates about 75 branches in California and Texas. This kiosk inside a San Jose grocery store is one of the original locations. Customers drop by to make loan payments in cash. I spoke to folks who borrowed money for medical bills, college expenses, even a woman who is building a house back in Mexico $2,500 at a time.
Javier Guijose did have one complaint.
Javier Guijosa: I like it. But the interest rates are expensive.
He says he likes the company, but thinks the interest rates are expensive. A $500 loan paid over seven months carries an annual interest rate of 46 percent. For a larger loan spread out over a year and a half, the interest rate falls to 36 percent.
Lauren Saunders is managing attorney with the National Consumer Law Center.
Lauren Saunders: Thirty-six percent or 46 percent is a lot. But it’s not impossible if it’s over a long enough period of time, in installments, without fees that pile up.
Saunders has studied alternatives to payday lenders, including Progreso Financiero.
Saunders: This is much better than a payday loan.
For example, Progreso only charges a single fee. And borrowers can’t take out a new loan until they’ve paid off the first loan.
Saunders: A payday loan is repayable at your next payday. That could be, you know, two weeks later, in a big lump sum. And it just puts you behind the next month, which forces you to borrow again and again and again, with a new fee every time at rates that add up to 300 or 400 percent annual interest or more.
Comparatively, Progreso Financiero sounds like a bargain. The company’s not yet profitable, so it also pays high rates for the money it lends out. CEO Raul Vazquez says as the company’s costs decrease, he plans to pass along that savings to customers in the form of lower interest rates.
In San Jose, I’m Jeff Tyler for Marketplace.