Tuesday, November 27, 2012

Charity Check Cashing?

As the microfinance trend grows, I wonder why no major charities or foundations have looked to what I see as a point of obvious need – a charitable footprint in check cashing, payday lending, and other short term consumer debt. 

The idea behind microfinance is to provide loans to small businesses and entrepreneurs who either cannot get loans or have to pay exorbitant rates for loans they can get.  A nonprofit can step in and offer loans at interest rates well below market rates and, in doing so, help promote individual success and local economic growth.  To me, these same principles can and should be applied to payday lending.

Let me first briefly discuss the field of “payday lending”.  This broadly refers to unsecured consumer debt that is issued for very short periods, say one or two weeks.   Such loans are called payday loans since they often serve to provide liquidity until the borrower’s next paycheck.  Check cashing services are even shorter loans that permit the borrower to get immediate cash advances on paychecks rather than waiting for them to clear the bank.  With these short-term loans, the implied interest once fees are taken into account can be quite substantial.  In fact, a recent study by The Pew Charitable Trusts found that over 12 million Americans use payday loans each year, and even though the average loan is only $375, the average person pays $520 annually in interest/fees.

The next thing to consider is why charities can be helpful.  For one, the consumers of payday loans are clearly cash-strapped and can use help.  And, given the high costs and often predatory nature of the payday lending business, a benign service provider can provide such help.  Finally, though some may worry that payday lending by charities would only exacerbate the problem of living beyond one’s means by removing some of the down side, it should be noted that the alternative is not the consumer cutting back on expenditures but is instead consumers relying on more expensive options.  And, a charity can use this platform not only to provide short-term relief but also to provide long-term help by offering (even requiring) consumer credit counseling for borrowers.

The Asset Recovery Kit (ARK) program of the PenFed Foundation is a program of this sort offered to military families.  Though small scale, it has been quite successful.  My opinion is that a similar large-scale offering by a major charity could notably change the financial prospects for many struggling families and could do so only at relatively modest cost.

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