NEW YORK – Five members of the National Federation of Community Development CUs will launch a new payday loan program that is easy to qualify for and requires savings for every borrowed dollar.
The Borrow and Save loan requires no collateral, no credit report, is processed within 24 hours or less, has an interest rate of 18%, a fee of $20, and a term of 90 days. It also incorporates an asset-building component that requires a portion of the loan go directly into savings, and encourages additional saving with a savings bonus to the borrower when the loan is fully repaid.
The five participating credit unions: Love Gospel Assembly FCU in the south Bronx, Union Settlement FCU in Harlem, Northside FCU in Chicago, Santa Cruz (Calif.) Community FCU and Freedom First FCU in Virginia, will combine their Borrow and Save loans with debt counseling and financial literacy as a way to help borrowers become more financially secure.
While New York’s 25% usury cap keeps most storefront payday lenders out of the state, predatory lenders, including Internet payday lenders, pawn shops, rent-to-own stores and loan sharks, continue to offer high-priced loans to needy consumers. The Borrow and Save loan will provide a less costly alternative, the Federation said.
The pilot is being funded by a $25,000 grant from Morgan Stanley, of which $5,000 will be granted to each CDCU. The money is being used either for loan loss reserves or, in some cases, to match the savings, or, in the case of Union Settlement, to give the borrower $20 upon repayment. Love Gospel similarly is giving borrowers 5% of the loan amount upon repayment.
The rates vary but average out to 18% for the five credit unions, before accounting for the bonus at repayment or matched savings which, on a small dollar/relatively short term loan, can effectively buy down the interest rate by several points.
