There are plenty of politicians, from Chicago to Arizona, who will complain endlessly about the payday loan industry. They accuse payday lenders of usury, and decry the high interest rates associated with this kind of credit. They’ll propose legislation that shuts these businesses down. Yet, very few have offered workable alternatives. The fact of the matter is that most people who use payday loans aren’t in a position to get credit by traditional means.
Well, controversial mayor of San Francisco, Gavin Newsom, has decided to do something about it. Rather than just gripe about payday loans, San Francisco is trying to offer a real alternative. At the Mission Neighborhood Center on April 17, the Payday Plus SF program was unveiled. The program is designed to offer residents of San Francisco an alternative to payday loans that’s affordable.
This micro-lending program involves six different local credit unions. The idea is to offer low-income folks a way to avoid the payday loans, which can have an annual interest rate of over 400 percent.
The way it works is this: the credit union offers customers loans in amounts from $50 up to $500 maximum. The percentage rate for the loan is a reasonable 18 percent, which is about the same as the average credit card interest rated. Borrowers then have 12 months to pay off the loan.
Newsom recognized the need to get quick cash for expenses that aren’t planned, and he also recognized the need for such businesses. He hopes that, by introducing alternatives, people won’t have to turn to payday lenders.
The city, of course, can’t shut down payday lenders arbitrarily. However, city council members hope that the program will allow families to get out of a cycle of debt, giving them access to “healthy” financial institutions.
Currently, California state law lets payday lenders charge fees of $15 per $100 loaned. This works out to a maximum loan amount of $255, for which the total charge is $300 with fees. Because of the short term of payday loans, most people who take advantage of the service don’t hold the loan for a full year. However, many do renew their loans for several pay periods, creating a situation in which fees grow and grow over time.
There have also been attempts in California to cap interest rates at 36%, which would effectively put an end to most payday loan businesses.