Home > Personal Loans > Bad Credit Borrowers Get New Option as Payday Loan Reform Looms

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People with bad-to-no credit often struggle to find financing. Because they’re viewed as a risk among traditional lenders, some of these folks turn to small-dollar payday loans for emergency cash. But these loans come at a cost: In many cases, the annual percentage rate (APR) on a payday loan averages about 400% and can run as high as 5,000%.

There’s been a push from consumer advocates to make small-dollar credit more accessible and more affordable for low- and moderate-income credit-challenged consumers.

Now on the heels of sweeping new regulation that would drastically alter the payday and title lending industries, Equifax and the National Federation of Community Development Credit Unions are trying something new.

The credit bureau and nonprofit credit union trade group announced plans on Monday to build the Westside Financial Capability Center, in Atlanta. The center is intended to provide “affordable banking, alternatives to payday loans, affordable home mortgages, and a suite of financial services designed to empower residents to achieve their financial goals,” the company said in a press release.

How the Center Will Work

The center’s borrowers will be able join one of four participating credit unions, which will provide the aforementioned suite of products. Small-dollar loans will be available to address immediate financial needs.

“We’re designing the product to be flexible for emergency needs, but the intent is to get that relationship started,” said Cathie Mahon, president and CEO of the Federation of Community Development Credit Unions.

Upfront fees and high interest rates have become the norm for short-term credit as many lenders can’t turn a profit otherwise. But credit unions are able to buck the trend and offer more affordable rates on short-term credit because they “tie their financial outcome to the success of the borrower,” Mahon explained. “We need you to be successful in this small-dollar loan.” The hope is that consumers will stick with the credit union when it comes time to get a mortgage or other traditional line of credit.

The new center’s small-dollar loans will be subject to an 18% interest-rate cap, a mandate for federally-chartered credit unions.

“There may be a small application fee” depending on the credit union, Mahon said, but all financing will be compliant with the Consumer Financial Protection Bureau’s recently proposed regulations regarding payday lending. Those regulations stipulate, among other things, that short-term lenders should verify borrowers’ ability to promptly repay loans and not repeatedly issue loans to the same customers.

“We’re still going to underwrite to make sure you have the ability to repay,” Mahon said, but the center plans to look at credit reports to get a sense of a person’s total debt in lieu of using a credit score to determine approval.

Financial counseling will also be available to prospective borrowers.

“The counseling is the opportunity to say, ‘Let’s take stock of what’s going on overall,'” Mahon said. “Is this the right thing for you? Where are you going with this?”

Equifax and the Federation have identified a temporary site for the center and plan to have it up and running by August. It’s essentially a pilot program that aims to ensure the new model works before expanding to new locations, said David Stiffler, community affairs manager for Equifax. The first location will open in the broader Atlanta area.

Securing Short-Term Credit

Right now, there are few alternatives to payday loans, as short-term credit models are being tested and proposed regulations await final approval. So if a payday loan seems like your only option, it’s a good idea to work on improving your traditional credit scores so you can secure more affordable financing. (You can see where your credit currently stands by viewing your two free credit scores, updated every 14 days, on Credit.com.)

In general, you can fix your credit by disputing any errors on your credit report, identifying credit score killers and coming up with a game plan to address those issues.

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