Thursday, August 7, 2008

Predatory Alternatives?

"[S]mall-loan alternatives could be key to making the District's new interest rate cap work without intentionally harming low-income borrowers."

Jordan Weissman, Credit Unions Slowly Fill Void As Payday Lenders Leave D.C., Washington Post, July 26, 2008

So, payday lenders have taken a hike from D.C. because of the interest rate cap of 24percent that went into effect in January of this year. The two largest payday lenders in DC made 260,000 loans, totalling $125 million, in 2006 for loans in the range of $300-1,000.

What happens now? Credit unions fill the void? People cross state lines to Virginia or go Internet? Bounced checks function as payday loans. Consumers turn to other types of alternative lenders, including family and friends. Or, people tighten their belts and do without?

This is the kind of policy change experiment that bears careful monitoring and evaluation. It also requires the cultivation of alternatives for people who just can't make ends meet, an increasing number given the economy. This is one of those good policy changes that could have unintended bad consequences. But let's also admit that developing sound alternatives may take some time to do right.

Payday lenders have a history of being more aggressively market and consumer focused -- in your face, on TV, out on the street, and in the neighborhood. That has been a bad thing. But did they fill a gap or make the gap? Credit unions, alternatively, want a relationship with consumers, not just a convenient transaction. You would think that it would be a slam dunk with the annual interest rate differential being so huge -- 16-18 percent for credit unions and $300 percent or more for payday lenders.

Has anyone developed an effective grassroots marketing campaign that complements the legislation and good alternative credit products? Could we enlist DC businesses to get out the word to their employees?

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