and112812blogNear the top of the list of things I despise is companies that take advantage of the plight of the poor and desperate. But just above that on my list is something I hate even more: being poor and desperate. That’s why I loathe payday lending companies that charge usurious interest rates—and why I’m not yet ready to see them abolished.

Here’s how payday lending works. If you have a job (and pay stub to prove it), a payday lending company will allow you to write and cash a post-dated check. For this service the company will charge an absurd interest rate. A typical two-week payday loan with a $15 per $100 fee equates to an annual percentage rate (APR) of almost 400 percent. So if you need $100, you write the check for $115 and they’ll give you $100 in cash. Two weeks later they cash your check or you can renew or “rollover” the amount—for an exorbitant fee.

Why would anyone agree to such terms? Because they have no other choice. About twenty years ago I made some terrible choices and found myself in a serious financial bind. The amount I needed wasn’t much—about $200—but without it I wouldn’t have been able to pay my rent. I took out a payday loan that cost me $30 every two weeks. It took about eight weeks to get clear of the loan, resulting in a cost of $120 to borrow $200 for two months.

If you’re middle class and think of it in terms of interest rate, that repayment cost sounds appalling usurious. And it is. But as the poor will tell you, man does not live on APR alone. Having to pay an extra $120 was cheaper than having to find a new place to live. Yes, it was a bad deal. But it was better than all my other choices.

That is why I believe every serious critique of payday lending needs to be accompanied by a serious proposal to help those who are trapped by such “poverty problems.” An excellent example of an alternative approach is the one offered by Wesley Memorial United Methodist Church in Richmond, Virginia. One of their church members, Nina McCarthy, was initially trapped in the vicious payday lending circle:

Every month for about three years, Nina McCarthy followed the same routine after payday. She’d go into a Check Into Cash near her home in the Richmond, Va., area and pay off an open-end loan for $700 or $800 – and then she’d take out a new one for the same amount, never accumulating interest in the process.

Then McCarthy’s overtime hours at work were cut. With rent, a car payment and a 3-year-old granddaughter to feed, McCarthy didn’t have $700 for Check Into Cash. McCarthy made a partial payment, but interest piled up rapidly, at a rate she recalls was 24.9 percent a month, or a nearly 300 percent annualized rate.

McCarthy estimated she paid more than $1,100 on the bill in the first three-quarters of 2014, including payments that Check Into Cash began collecting directly out of her bank account. Then in September, she had a stroke. She closed her bank account and hasn’t made any payments since.

When she went back to the Check Into Cash store recently, an employee directed her to the collection line that has taken over her account. McCarthy was told she still owes nearly $650 on the line of credit and doesn’t know when she’ll be able to pay it off.

That forced McCarthy to turn to her pastor, Rodney Hunter, at Wesley Memorial United Methodist Church. Hunter helped her borrow $700 so she could make a dent in paying off her mounting credit card debt, then about $8,000.

Here’s how it worked: McCarthy’s church offered funds as collateral so she could qualify for a loan through the Virginia United Methodist Credit Union. McCarthy agreed to repay the loan at an annualized interest rate of about 6 percent – meaning monthly payments of $25 for about 2 1/2 years, drawn right out of her bank account.

McCarthy is one month behind on the church loan, but she’s confident she’ll catch up this month. “I’m real grateful for it,” she said.

The program is called the Jubilee Assistance Fund. In 7 1/2 years, it has helped parishioners of the United Methodist Church secure 14 loans – from $500 to $8,800 – according to Carol Mathis, chief executive of the credit union.

Similar initiatives run by faith-based organizations across the country are shifting the way churches approach charity. These programs offer parishioners an alternative to commercial lending agencies, which often charge triple-digit annualized interest rates.

Caring for the poor is not just about food banks and handouts. Sometimes the best way to help those in need is to provide a financial bridge during desperate times that helps them cover short-term situations. If more churches in America were willing to offer such programs there would be much less need for Christians to turn to payday lending companies. It’s a relatively easy and cheap way for churches to make a profound difference in their congregations and in their community.

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  • Roger McKinney

    Yes! That would be a great ministry!

  • Erica

    Excellent idea!

  • mikesensei

    Good idea, but if they’re putting up collateral for such small loans, it seems like they should be able to find some folks who would be willing to give directly and share the load to help out instead of losing money on the interest…

  • kevcal51

    The reason Payday loan companies exist, along with car title loans and other such services is because the regular banks will not touch these clients. The interest rates reflect the default rates of such loans, which is one reason that banks will not offer services to such clients. For example, there are also all the check cashing companies for those who can’t get a bank account. if it weren’t for these latter, some working poor would never be able to cash a check. Since they don’t have a bank account, debit cards won’t work either.

    It is one thing to loathe such services and the interest rates and fees that they charge, it is another to put in place services that will replace the high priced ones that are available now.

  • Joe Carter

    I’ll play devil’s advocate and give one reason: it’d require churches to discipline their congregants, something many churches are hesitant to do. If someone refused to pay back the loan the church would need to confront them and demand they do their Christian duty and keep their word. But then, that person who was loaned the money could just leave the church and there isn’t much the church could do to collect on the bad debt.

  • BigDaddyWeave

    If you’re not yet ready to see payday lending companies abolished, would you support significant reforms via federal regulation (CFPB) or an interest rate cap by way of federal legislation (for the general public, something similar to the Military Lending Act)?

    Given the long history of outlawing usury in our nation, seems like at least abolishing usurious interest rates would be a great thing – I’m sure ACE and CASH AMERICA can still find ways to be profitable….