Payday and auto title loans offer a quick way to get money, but they come at a high cost. To make matters worse, they often must be repaid in a matter of weeks. Across the country, 12 million adults use payday loans annually, according to a study by Pew Charitable Trusts.
The Community Development Corporation (CDC) of Brownsville in Texas saw the effect that these types of loans were having on people in their community.
"Many of our clients were stuck in a cycle of predatory loans," said Melissa Landin, CDC of Brownsville's public relations and marketing coordinator. "They were taking out [these] loans and using one to pay another one." The cycle can prove hard to escape.
CDC of Brownsville, a NeighborWorks organization, created a better option by providing access to small loans with lower fees and more reasonable repayment terms. They created the Community Loan Center (CLC) in 2011, and began franchising it in 2014, bringing the service to cities across Texas. Now, there are CLCs located in several states.
An essential part of the CLC model is its small dollar loans program. The loan program works as a financial wellness benefit that employers can make available to their benefit-eligible employees.
Through the program, employees can borrow between $400 to $1,000. The loan term is 12 months and it is repaid through payroll deductions. The interest rate is 18 percent and there is a $20 administrative fee. The service comes at no cost to the employer.
Not only does the program provide an alternative to predatory loans, it also fills a gap in more traditional bank loan programs that do not offer loans of this size. In addition, no credit history is needed and no collateral is needed to secure a loan.
The program has taken hold around the country. Since 2011, the network of CLC programs has completed more than 48,000 transactions, and loaned more than $50 million.
In Dallas and Austin, BCL of Texas operates CLCs, where they find that even high earners may need access to this type of loan program if they find it difficult to make ends meet or cover unplanned expenses because they lack savings or a strong credit history.
"What we are trying to do is give employees access to credit should they not have it available in the traditional sense, but the solution that we are working on is helping people stay away from predatory lenders," said Cruz Correa, Community Loan Center Manager, BCL of Texas.
Financial capability education is another important part of the CLC model. BCL of Texas offers coaching to help clients learn skills such as budgeting, saving, goal setting and planning for emergencies and regular life events such as back-to-school, family vacations, birthdays and family celebrations that happen throughout the year.
"Our perfect client would be somebody who uses the loan once, maybe twice, but once they finish paying it off, they take the same payment amount and start putting that into their savings," said Cruz.
Chattanooga Neighborhood Enterprise launched the CLC of Southeast Tennessee at the end of 2018, with the goal of bringing the affordable loan option to people in need in their community, where according to a recent assessment, rates of payday borrowing are high.
"There is a need for this type of loan product that is usually not readily available in the community," said Mauri Systo, program coordinator.
Systo also noted that CLC loans tend to have a very low default rate because the payments are made through payroll deduction.
Borrowers have access to the financial coaching services such as Money School classes and financial literacy workshops offered by Chattanooga Neighborhood Enterprise, as well, which can help put them on a new financial path.
The CLC is just getting off the ground in Chattanooga, and continues to do outreach to develop new partnerships with employers and spread the word about its loan program. Across the country, for people caught in a payday loan cycle, the small dollar loans program might offer a way out.
Lessons Learned
While BCL of Texas and CLC of Southeast Tennessee are good examples of loan program success stories, as with any new project, there are important lessons that are learned along the way during implementation. Systo and Correa said their organizations were no exceptions to that rule.
"Some of the challenges can involve bringing on employers," says Correa. "I would recommend for anyone interested in the CLC program to also start working on building a coalition of advocates that can help you bring large employers/decision makers to the table. Doing so will give you a head start in both the lending aspect and building a financial capabilities program that truly benefits all employees."
Systo says that how they reach out to local business was a lesson learned for CLC of Southeast Tennessee.
"We noticed that cold calling for this program in attempts to reach out to businesses that are a good fit for the program has been quite difficult," explains Systo. "Rather, we depend on networking and recommendations from community and business partners to help get the word out. This program is no cost. It isn't something we are trying to sell to folks. It is a benefit that can be offered by businesses."
Systo cited the following as examples of some programmatic benefits for employers to start the program:
- Availability of the program demonstrates employer dedication to helping employees become financially stable.
- Employer-based financial assistance to workers has been shown to decrease employee turnover.
- Benefits strengthen loyalty to employer.
- Reducing financial stress can help improve job performance.
"Likewise, it takes interested community members to see the benefit of this program on a larger scale," Systo says. "Not only do we want a community of financially literate and stable workers, but importantly, this is one of the few programs that can reduce overall dependence on payday lending."
