Payday loans: What are the alternatives?
Critics of high-cost payday loans say many people have no borrowing options from mainstream financial institutions to get quick loans in small amounts, so they turn to payday lenders as their only practical alternative. But a range of diverse organizations are now proposing new models, saying there are better ways to provide loans to low-income people.
Church of England
In the U.K., the Church of England has launched a direct attack at the payday loan industry, announcing plans to set up its own credit union through the nation’s churches. Justin Welby, Archbishop of Canterbury, has led the charge, declaring that he wants to put leading British payday lender Wonga out of business. After an embarrassing initial misstep when the church discovered it had invested £100,000 ($189,000) in Wonga’s parent company through a venture capital investment fund, the archbishop pressed ahead. The Churches Mutual Credit Union Ltd. launched in February, initially serving only ministers, employees and trustees of the church and its partner churches – including the Church of Scotland. But as it gets established, CMCU is planning to expand and provide broader services to church members and the public.
Canada’s largest community credit union started a lower-cost alternative to payday loans in March of last year. Its “Fair & Fast Loan,” which has more flexible lending criteria, is designed to help members “get out of the cycle of debt” and build their credit history. Under the terms of the loan, if someone borrows $300 for the minimum of two months and pays it off after two weeks, it would cost $2.20, which is a 19-per-cent annual percentage rate. Vancity has funded more than 900 loans to date and estimates it has saved members more than $1.5-million in interest and fees “due to the different in the cost of borrowing a Fair & Fast Loan and a typical payday loan.”
The Canadian Union of Postal Workers has urged Canada Post to launch a new line of business that provides basic banking services through post-office outlets. CUPW argues that many other countries, including Britain, France, Italy and Japan, provide extremely popular banking services through their post offices and said the proposal could buoy Canada Post’s flagging business. CUPW argues that post-office banking would particularly benefit people who do not have bank accounts and rely on high-cost alternative lenders for services such as cheque cashing – including people in many rural, low-income and aboriginal communities where there are post offices but few bank branches. Canada Post has rejected the proposal, saying the challenges to making post-office banks viable are “insurmountable.”
The credit union runs an emergency-loan program, in collaboration with budget-consulting organizations in Quebec and Ottawa. The fund is aimed at people in financial difficulty. To get financing, members have to agree to produce a budget (with help from a budget-consulting expert). The financing consists of an interest-free loan with a repayment period of 12 to 24 months, depending on the amount granted, which ranges from $500 to $1,500. Loans are paid back “according to your financial capacity.” Once the loan is repaid, it is then lent out again to other people in need.
Momentum, a Calgary-based community group, launched a micro-loans pilot project last month with the First Calgary Financial credit union to provide people with small, emergency loans. It’s the first “affordable, short-term loan to compete with payday loans in Alberta,” they say. In the first phase, only people affiliated with Momentum are eligible, which will screen and write referral letters. The loans, for up to $1,500, have an interest rate of up to 12 per cent a year, annualized. The pilot is for up to 60 people, but the hope is that the program eventually becomes a regular part of the credit union’s services.