Playbook: Alternative Lenders
Credit is an essential tool for wealth creation. We use it when we swipe a credit card to buy food or take out a mortgage for a home. But access to credit has become more inequitable even as financial and technological innovations have transformed the banking industry.
Millions of low-income Americans do not have bank accounts. These unbanked individuals tend to rely on nontraditional services, like predatory lenders and check cashers, that hinder financial stability.
For many low-income individuals, a nontraditional service might be the difference between eviction and having a roof overhead. Someone might be looking at having the water cut off or not having food to eat.
New models are emerging in this space.
There’s an organization in Oakland, California, that leverages check cashing regulations to protect its community rather than its bottom line. A partnership between a Texas bank and businesses offers small loans to employees. A Chattanooga organization offers emergency assistance to help people pay their utility bills.
This playbook outlines these alternatives and compares them to predatory lending businesses.
| Predatory lenders | Businesses, such as payday lenders and check cashers, that charge high fees and interest rates on loans. They typically provide fast turnarounds on loans and do not conduct credit checks |
|---|---|
| Community check cashing | An Oakland-based nonprofit that provides check cashing and personal loan services at interest rates significantly lower than predatory lenders but higher than traditional banks |
| Community loan center | A partnership between the Rio Grande Valley Multibank and Texas employers allows workers to take out small loans against future earnings. Loan payments are deducted from borrowers' paychecks |
| Emergency assistance | Small grants to cover overdue utilities, rent, and other necessities. The federal government administers the Low Income Household Energy Assistance Program (LIHEAP). Nonprofits such as Metropolitan Ministries also offer emergency assistance |
| Credit cards | Credit lines are extended to consumers. Money is borrowed at time of purchase and repaid at an interest rate based on credit history. Those with lower FICO credit scores can open secured accounts with an initial deposit |
Annual Percentage Rates and Fees
| Predatory lenders | Tennessee allows a maximum 459% APR with fees capped at 15% of the principal |
|---|---|
| Community check cashing | Cashing fees for checks between $300 and $1,000 are capped at 1.25%. Payroll advances are available for $7.25 per $100 borrowed |
| Community loan center | Charges $120 in fees on a $1,000 loan |
| Emergency assistance | N/A |
| Credit cards | APRs and fees vary by provider but generally fall between 12 and 25% |
Repayment Window
| Predatory lenders | Typically two weeks. Title and flexible loans may be longer |
|---|---|
| Community check cashing | Two weeks for payday loans. Window for larger personal loans is longer |
| Community loan center | Twelve months |
| Emergency assistance | N/A |
| Credit cards | Minimum monthly payment. Balances can be carried month to month |
Repercussions From Default
| Predatory lenders | Borrower receives overdraft fees from the bank and lender. Lenders may turn default borrowers over to aggressive collections agencies, which harass customers, garnish wages, and threaten legal action. Alternatively, customers are able to "roll over" a default loan and extend the due date, which increases a customer's overall debt burden |
|---|---|
| Community check cashing | Loans are extended to prevent default |
| Community loan center | Default is rare because payments are automatically deducted |
| Emergency assistance | N/A |
| Credit cards | May trigger high APRs and fees, and lower borrower's credit score. Eventually turned over to a collections agency |
Pros and Cons
| Pros | Cons | |
|---|---|---|
| Predatory lenders | Lenders are convenient with around 1,200 locations in Tennessee. They do not check credit history and lend quickly for people who need to pay utility bills or other emergency expenses | Customers can collect high fees and become trapped in debt if they miss a payment. These lenders also contract aggressive collections agencies that resort to unsavory tactics bordering on harassment |
| Community check cashing | This nonprofit targets consumers underserved by traditional banks. It lends at lower interest rates than predatory lenders. Since 2009, the organization estimates it has saved the Oakland community $1.2 million | The organization is only based in Oakland, California. Payday loans are capped at $300 and personal loans up to $5,000 |
| Community loan center | Bank and employers’ partnership offers affordability and convenience | Loans are only available to salaried employees of participating Texas employers. Loans are capped at $1,000 |
| Emergency assistance | These programs provide financial assistance to people who need to pay utility bills or other emergency expenses with few or no strings attached | Programs are limited in scope and coverage. The LIHEAP application process is difficult to navigate, and application windows are often closed. Charitable organizations are limited by their financial resources |
| Credit cards | Credit cards are easy to obtain, use, and pay back. Companies often offer reward or cashback programs. They also offer flexible repayment windows | They can be problematic when abused. Credit cards can trap consumers in debt over time. They also aren't readily available to low-income Americans and people with poor or no credit histories |
Peter Hagemeyer
Peter Hagemeyer’s background is in economics and business. He joined our research staff in 2016. He shifted roles to public engagement in 2018 — driving Metro Ideas Project’s community outreach efforts. He is a a Counter Culture Coffee certified barista and directs our coffee program. If your organization should get to know MIP, don’t hesitate to contact him.