Each time we editorialize about the dangers of payday lending, we can count on at least one letter to the editor asking whether we’d prefer to send distressed borrowers underground to some guy who might break their leg if the money isn’t repaid on time.
Of course the answer is no. But paying 400 percent interest on loans that roll over and pile up debt faster than the odometer on your car isn’t exactly a safe financial route either.
Innovative alternatives exist, including one with tremendous potential that just received state approval to come to Dallas.
Business and Community Lenders of Texas, an Austin-based nonprofit, now needs to find employers and financial backers willing to sponsor the small-loan program as part of employee benefit packages.
Suppose your car breaks down or the water heater bursts. If you are enrolled with BCL through your employer, you would be able to get $1,000 quickly. The one-year loan would be capped at 18 percent interest, and BCL would allow you to make installment payments. This differs from the approach of payday lenders, who entice you to roll over the loan and continue to pile up debt.
Under the BCL plan, loan payments would be taken directly from your paycheck, much like health care premiums, child support or United Way contributions. BCL also will provide financial counseling to borrowers through nonprofit partners.
The concept started about three years ago in Brownsville with the Community Loan Center. That group, not affiliated with BCL, has completed about 2,500 transactions. That’s $2.5 million in loans and a default rate of about 5 percent, far less than that of payday lenders.
That’s not cheap money, but it’s much better than payday rates. Plus, programs like BCL’s are targeted at employees who fit the profile of the typical payday borrower — hardworking people of modest means whose sudden financial setback sends them searching for relief.
Dallas city officials will be briefed on the BCL program early next month. The nonprofit is recruiting employers to participate and charitable and philanthropic organizations to help provide seed money, including an Internet crowd-funding campaign on Indiegogo.
Raquel Valdez, the group’s chief operating officer, said the group is starting small with about $250,000 and a handful of borrowers “to prove the concept.”
There is a dire need for small loans and grass-roots alternatives to payday lending. In time, the BCL program could grow and take a real bite out of the industry. That’s why nonprofits, employers and philanthropic organizations would be wise to support an operation like this one.
