Thursday, October 27, 2011

The Interest Rate for Low Income Workers from Payday Loans

A Glimpse Into What Its Like Being Poor – It’s Not Pretty

If you are not poor and have a not great but decent credit rating you have a lot of choices if you need to borrow money.  Banks are out there, and even with today’s real estate problems there are still home equity loans to be had.  If you need to you can get a cash advance on a credit card, and pay a high but not exorbitant interest rate.  And of course there is always friends and family.

If you are a member of the working poor, things are not always that great.  Now at least in some areas businesses are starting to help out their employees.   Here is what a typical “Payday” lender charges.

Payday lenders typically charge 15 percent for a two-week advance, a fee equivalent to an annual interest rate approaching 400 percent—and that quickly escalates when borrowers roll over loans and pile up new fees.

Yes it is more than loan sharks, but hopefully if you cannot pay you can still walk to work because your kneecaps are not busted.  So some employers are stepping into the business of making payday or payroll loans to their employees.  Most are doing it through third parties.

When Kendra Beasley and her husband separated last spring, her bank account was empty and she needed cash for a deposit on a new rental home. Instead of going to a payday lender as she had done once before, Beasley got a $500 loan through her employer, a Sonic Drive-In (SONC) in Globe, Ariz. When her next paycheck came, the money, plus a $24 fee, was deducted.

But before anybody gets all weepy about what a great thing Sonic is doing for Ms. Beasley, that rate comes about to about 125% simple interest per year.  Yes it is a far better deal than 400%, but notice that the repayment is taking place from a deduction from the paycheck, meaning the risk to the lender is substantially reduced.  This rate, 125% for a low risk loan just doesn’t sound right, but if you are poor and if you need the money that’s what you do.

There are better alternative coming on to the market

FlexWage makes advances out of employers’ payroll accounts, based on hours workers have already put in. Clients get Visa (V) cash cards to pay salaries, which FlexWage says cost half as much as paper checks. Workers pay $5 or less for each cash advance, and employers pay $1 to $2 monthly per employee for the cards. Companies can limit how much workers take in advances, because the goal “is to eliminate the need for an employee to go to a payday lender, not to give them daily pay,”

And another company recognizing the relative safety of payroll loans

Emerge Workplace Solutions helps employers offer longer-term loans of up to $2,500 at annual interest rates from 9 percent to 18 percent. When loan payments are taken out of paychecks, workers have the option of diverting extra money into a savings account. The company, majority-owned by the nonprofit investment group New Foundry Ventures, aims to help people build long-term savings and avoid the need for future payday loans, says CEO Jonathan Harrison

But notice that this is a non-profit, one of those “do-gooders” out there ruining it for all the private companies that want to charge 400%.  But don’t worry,

For all three startups, the trick will be getting managers at big companies to buy into the idea. “The CFO’s going to say, ‘I’m an employer. I don’t want to be a lender,’” says Arjan Schütte, managing partner of Core Innovation Capital, a venture fund that invests in financial services for low-income people. The idea “has tremendous potential,” he says, though he hasn’t yet invested. Making it work is difficult because in most cases, he says, “the employer just doesn’t care enough.”

 And as long as there are enough employers that just don’t care enough the private 400% lenders will do just fine.

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