Here's a plan to replace payday lending

Here's a plan to replace payday lending
Let's create a new emergency credit pool


By PAUL STILLWELL
For the Monitor


--------------------------------------------------------------------------------

July 20, 2008 - 12:00 am



Re "State has forced me out of business" (Monitor letter, July 12):

Part of David Martin's letter strikes me as true. For the most part, folks who use payday loans are honest, hard-working folks who occasionally need a little help. For that reason, it is important that we find a way to help them and, at the same time, help ourselves. The way we do that is to make payday loans less relevant.

Taking a cue from St. Mary's Bank in Manchester, we can structure a system which does that. Instead of offering payday loans with onerously high interest rates, we need to offer folks an emergency line of credit. St. Mary's does this by allowing folks to choose between a $250 or $500 line. The loan has a longer payback time than the payday loan. A payday loan usually carries a one-month term, while an emergency line of credit may carry a six- or 12-month repayment term.

Unlike a payday loan, a borrower must repay a loan before taking out a new one. This system makes it easier to repay by stretching out the payments into smaller chunks. It also means folks don't incur deeper debt to pay off existing debt. The loans carry a relatively small interest rate under the 36 percent cap allowed by law.

Where we can improve on this model, albeit slightly, is to create a community-owned pool of money to be used expressly for emergency credit. A lender commits money into a community owned CD for a period of years with a higher-than-average rate of return, say 6 percent. Once the pool has grown to a sufficient size a partner organization, whether a credit union or local bank or other nonprofit offers emergency credit lines at a decent rate of 16 percent or so.

The money in the pool, the fixed return and the risk remains the property of the lenders while the partnering organization gets the rest for operating expenses and profit. This does a couple of things. While the borrowers have a low-cost alternative to the parasitic payday lenders, a guaranteed chunk of the money stays in the community. With a tanking stock market, declining 401k accounts and falling home values, a 6 percent return can be an attractive option for small investors.

It is always important to invest in Main Street instead of Wall Street, and since this is all private money, the calls of whining conservatives becomes irrelevant.