Payday lenders promise a quick fix for a cash emergency.
But those short-term, high-interest loans are the rope that hangs many already-strapped households with unmanageable debt.
In 2007, Iowans took out more than 900,000 in payday loans. Almost half the borrowers took out these “emergency” loans at least a dozen times.
Industry advocates say the loans’ popularity is proof they serve an important need. But the Consumer Federation of America has compiled research that shows payday loan users often are worse off than similarly situated people who don’t take out that kind of loan — more likely to suffer financial hardship, to lose a conventional bank account, to also become delinquent on credit cards or file for bankruptcy.
Iowa legislators have taken several stabs at tightening the rules, as many states have, by limiting the number of loans borrowers can hold or the fees lenders can charge.
But while regulating the suppliers is important, we also have to take seriously the demand.
Enter Bankers Trust and Citizens for Community Improvement in Des Moines. They worked together this spring to offer 40 small-dollar loans to low- and midincome borrowers with bad credit.
CCI community organizer Chris Neubert told me it was flooded with more than 600 calls for information after announcing the program.
CCI offered credit counseling and worked with more than 100 applicants to develop a budget — a document Bankers Trust underwriters took into consideration when checking applications.
Most borrowers had credit scores under 580 and many used the money to get out of the payday loan cycle, Neubert said.
“We were seeing people with four, five, six payday loans for $500,” he said.
The bank loaned a total of $50,000 at 12 percent interest for terms of one to three years — compared with payday lenders’ two-week loans at an annual interest rate of 300 percent or greater.
CCI is looking for more partners to offer more loans in Des Moines. But there is clearly a demand here in the Corridor, too.
There are 18 licensed delayed-deposit lenders in Cedar Rapids, 10 in Iowa City/Coralville and three in Marion, according to the Iowa Division of Banking.
I wonder if anyone is willing to take the ball and start a similar program here.
It seems like a great opportunity not only to help people get through their latest financial emergency but also help them gain some traction on the road to financial security.
