Home > 2016 > Personal Loans

Bad Credit Borrowers Get New Option as Payday Loan Reform Looms

Advertiser Disclosure Comments 0 Comments

People with bad-to-no credit often struggle to find financing. Because they’re viewed as a risk among traditional lenders, some of these folks turn to small-dollar payday loans for emergency cash. But these loans come at a cost: In many cases, the annual percentage rate (APR) on a payday loan averages about 400% and can run as high as 5,000%.

There’s been a push from consumer advocates to make small-dollar credit more accessible and more affordable for low- and moderate-income credit-challenged consumers.

Now on the heels of sweeping new regulation that would drastically alter the payday and title lending industries, Equifax and the National Federation of Community Development Credit Unions are trying something new.

The credit bureau and nonprofit credit union trade group announced plans on Monday to build the Westside Financial Capability Center, in Atlanta. The center is intended to provide “affordable banking, alternatives to payday loans, affordable home mortgages, and a suite of financial services designed to empower residents to achieve their financial goals,” the company said in a press release.

How the Center Will Work

The center’s borrowers will be able join one of four participating credit unions, which will provide the aforementioned suite of products. Small-dollar loans will be available to address immediate financial needs.

“We’re designing the product to be flexible for emergency needs, but the intent is to get that relationship started,” said Cathie Mahon, president and CEO of the Federation of Community Development Credit Unions.

Upfront fees and high interest rates have become the norm for short-term credit as many lenders can’t turn a profit otherwise. But credit unions are able to buck the trend and offer more affordable rates on short-term credit because they “tie their financial outcome to the success of the borrower,” Mahon explained. “We need you to be successful in this small-dollar loan.” The hope is that consumers will stick with the credit union when it comes time to get a mortgage or other traditional line of credit.

The new center’s small-dollar loans will be subject to an 18% interest-rate cap, a mandate for federally-chartered credit unions.

“There may be a small application fee” depending on the credit union, Mahon said, but all financing will be compliant with the Consumer Financial Protection Bureau’s recently proposed regulations regarding payday lending. Those regulations stipulate, among other things, that short-term lenders should verify borrowers’ ability to promptly repay loans and not repeatedly issue loans to the same customers.

“We’re still going to underwrite to make sure you have the ability to repay,” Mahon said, but the center plans to look at credit reports to get a sense of a person’s total debt in lieu of using a credit score to determine approval.

Financial counseling will also be available to prospective borrowers.

“The counseling is the opportunity to say, ‘Let’s take stock of what’s going on overall,'” Mahon said. “Is this the right thing for you? Where are you going with this?”

Equifax and the Federation have identified a temporary site for the center and plan to have it up and running by August. It’s essentially a pilot program that aims to ensure the new model works before expanding to new locations, said David Stiffler, community affairs manager for Equifax. The first location will open in the broader Atlanta area.

Securing Short-Term Credit

Right now, there are few alternatives to payday loans, as short-term credit models are being tested and proposed regulations await final approval. So if a payday loan seems like your only option, it’s a good idea to work on improving your traditional credit scores so you can secure more affordable financing. (You can see where your credit currently stands by viewing your two free credit scores, updated each month, on Credit.com.)

In general, you can fix your credit by disputing any errors on your credit report, identifying credit score killers and coming up with a game plan to address those issues.

More Money-Saving Reads:

Image: YinYang

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

Certain credit cards and other financial products mentioned in this and other articles on Credit.com News & Advice may also be offered through Credit.com product pages, and Credit.com will be compensated if our users apply for and ultimately sign up for any of these cards or products. However, this relationship does not result in any preferential editorial treatment.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Our Owners

Credit.com is owned by Progrexion Holdings Inc. which is the owner and administrator of a number of business related to credit and credit repair, including CreditRepair.com, and eFolks. In addition, Progrexion also provides services to Lexington Law Firm as a third party provider. Despite being owned by Progrexion, it is not the role of the Credit.com editorial team to advocate the use of the company’s other services. In articles, reporters may mention credit repair as an option, for example, but we’ll also be sure to note the various alternatives to that service. Furthermore, you may see ads for credit repair services on Credit.com, but the editorial team isn’t responsible for the creation or implementation of those ads, anymore than reporters for the New York Times or Washington Post are responsible for the ads on their sites.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team