A New System To Put An End To Predatory Loans

When money is lent out at punishingly high interest rates, it’s often to those who can least afford it. Pay day loans--the same-day loans that are designed to help borrowers make it to the next pay check--often charge as much as 400% interest. This can put struggling workers even more deeply in debt and perpetuate poverty in already poor communities.

The Center for Responsible Lending estimates that the typical borrowers for such short-term loans pay around $500 in interest for a $300 loan, even before paying back the capital. This interest makes up most of the short-term loan industry’s profits.

But a company called Emerge has created an alternative to payday loans to help workers lead more financially stable lives. Emerge will lend up to $2,500 to people for emergencies, or to reduce their overall debt burden. Financial institutions back the transactions, and successful payments build a credit record. It’s a scalable model for the 50 million "underbanked" workers to give them mainstream banking relationships, and keeps money in workers’ pockets, says the company.

It works by partnering with employers who give their workers instant access to mainstream financial products through the same system by which it pays them. A employee can apply for a loan online, and that loan will be approved and deposited within a day at interest rates of about 10% to 20%, far below those at payday lenders. The loan only needs to be paid back within four to eight months, as opposed to the one month often required by pay-day lenders. Repayments are automatically deducted form subsequent paychecks, and Emerge also offers financial coaching to help break old cycles of debt.

But others have tried to fix the problem--without much success. Payday Plus SF is a coalition of San Francisco credit unions that offer preferential rates for pay-day loans. Needless to say, the hard-up areas of town still have plenty of payday lenders doing a brisk business.

Jude Gogan, CEO of the San Francisco Federal Credit Union, one of the participating financial groups, says her institution has only issued about three such loans during last six months. Most of those in need still return to the easy money at higher rates.

"I think [it’s] about convenience," says Gogan. "We’re still a credit union, and we’ve tried to make it easy, but it’s still not as easy as the 6th street [an area of San Francisco] lender which, as I understand it, you can walk in, show your ID, and get your money."

To succeed, Emerge will have to do more than make their loans financially attractive. It will have to make it much easier than going elsewhere.