One of the greatest success stories of American business is the rise of title loans. A loan so mischievous and unfair that it would seem like no one would take the bait. The popularity of the loan has been equal to selling rotten onions to people for cash. And it works year after year.
The good news is there is a new concept in short-term loans that may give companies offering title loans a few headaches.
Why Are Short-Term Loans Called “Predatory Loans”?
One of the most common short-term loans is the payday loan. A payday loan can often lead to a cycle of debt and financial ruin. Here’s how:
- A payday loan is taken out for $400 plus fees and interest and must be paid back by the next payday.
- If the borrower cannot pay, the balance is carried over until the next pay period.
- Fees compound as they carry over.
In the case of a title loan, the effect is similar. The title loan company lends you a certain amount based on the value of your car.
These loans are short-term and the fee is usually about 25% of the outstanding balance per month, which translates to a rate of more than 300% per year.
“The worst part may be that, while Texas lenders rarely check your credit report, they also don’t report when you pay your loan back”. – Dwayne Dumesle, Titlelo.com
If someone was to offer you a mortgage at 300% to 550% interest, you would never take that deal. With a short-term payday or title loan, those who need fast cash for bills or emergencies are not very concerned, probably because they are simply trying to get out of trouble.
When short-term loans first became popular, lenders deliberately targeted poor people living in underserved communities. The people they targeted were far less likely to pay off their loan on time, thus accumulating lots of interest and fees, all at a 547% per year rate. This was when the industry gained its reputation for predatory lending.
Alternatives to Predatory Lenders
After decades of swindling, some new lenders are starting to appear offering fair short-term lending products with reasonable interest rates. One of the more prominent alternatives has just started in Texas. It is called the Capital Good Fund (CGF).
CGF is new to Texas, but it’s not entirely new. Andy Posner started up CGF in Rhode Island during the last recession, and over more than a decade, they have lent $12.3 million, to around 5,900 borrowers. Their loan strategy puts a special emphasis on helping borrowers improve their credit scores.
Because they report loan payments to all three credit bureaus, the average CGF borrower sees a 90-point increase in their credit score when they pay back their loans.
When you compare that to the predatory lenders’ tendency to only report loan failures, you can see the difference.
Building a Better Economy
Posner thinks his company wouldn’t have to exist if the economy was working the way it should. In many reports, he has noted that, in a truly healthy economy, no one would ever have to borrow less than $500.
Everyone should be earning enough money to be able to pay all of their bills and other expenses, without putting their debt level at serious risk.
Posner has referred to the current economic problems as a systemic failure, rather than a failure on the part of individuals to keep up with the economy. The reason he started the Capital Good Fund was that he felt the current structure of the economy was leaving a lot of people behind, through no fault of their own.
The reason Posner has expanded the CGF to Texas is that he is seeing no improvement in those structural deficiencies, even after a relatively healthy recovery.
A Better Way to Borrow
The Capital Good Fund is now operating in six states, with Texas being the most recent. They are decidedly anything but a predatory lender. They are officially considered a Community Development Financial Institution, which means they offer small personal loans on very reasonable terms.
CGF also provides financial counseling to borrowers, to help them learn to manage finances even better. In Texas, they offer two categories of loans, including one to cover recent immigrants to cover their immigration costs. They lend between $2,000 and $20,000 at a rate between 15.99 percent to 24 percent, which is more in line with an average credit card than your typical payday or title loan lender.
In addition to helping borrowers meet immigration costs, they also offer short-term relief loans to cover costs associated with the COVID-19 pandemic.
These loans range between $300 and $1,500, and come with a five percent interest rate, along with a three-month deferment. Compare that with a payday lender’s average 547% annual percentage rate, and the difference is easy to see.
Relief for Texans
While it is true that CGF is a non-profit organization, its goal isn’t to lose money. It exists to help people without creating a never-ending debt cycle for borrowers. The coronavirus pandemic has managed to turn many people from living paycheck to paycheck to needing some help to make their very modest ends meet.
Most of the short-term loans made by CGF are used to pay items such as rent and utilities, as well as WiFi bills, so they can continue working from home, and car payments, so they can afford to drive to work.
The alternative offered by CGF offers a lot of people a viable alternative to the spiraling debt that is often caused by payday and title loans. In a state like Texas, which has nearly 2,000 stores selling these types of loans, CGF has proven to be a welcome relief.
Legally and officially speaking, payday and title lenders are limited to a 10 percent interest rate—anything above that is considered illegal usury—but the lenders get away with an overall rate above 500 percent by tacking on loads of fees onto the bill.
Compare that with the five percent being charged by Capital Good Fund, and it’s easy to see why so many Texans will feel relieved to see CGF coming to town and setting up shop.