A better way for payday loans

It’s a cycle that seems to repeat itself every legislative session in California. Advocates put forward a bill to curb the predatory practices of payday lenders. Then industry lobbyists squelch the effort, convincing state lawmakers that they’re the lenders of last resort, the only ones who haven’t abandoned low-income neighborhoods.

Never mind that the lenders’ generosity comes with quick and costly paybacks -- a blizzard of fees that can add up to an annualized interest rate of more than 400%. Indeed, the average borrower ends up borrowing again -- and again -- trying to pay back that first $300 payday loan, shelling out a shocking $800 for the privilege, according to the Center for Responsible Lending.

But there’s finally been a break in the pattern. Last week, San Francisco unveiled a program that communities throughout the state would be wise to follow. It will be the first city in the nation to partner with local financial institutions to market an alternative to the pricey payday loans that are sending too many borrowers into economic spirals.

Thirteen nonprofit credit union locations throughout San Francisco will jointly market a low-cost, small-dollar loan called Payday Plus SF.

They’re calling it “The better small dollar loan.”

They plan to go head-to-head with the storefront lenders that put up neon signs like “Fast money now,” “Why wait till payday?” and "$ while you wait.” And while the Payday Plus SF outlets may not feature the same glitz in their windows, they promise something more important -- a fair product.

The trouble with typical payday loans is clear. Let’s say you borrow the maximum $300 -- giving you $255 after the $45 fee. You guarantee repayment in full from your next paycheck, but by then other bills are due. You can’t pay back the first loan and must take out another. The typical borrower in California ends up taking out 10 loans per year before he or she can break the cycle, according to the California Budget Project.

The fees are economic body blows for low-income families. According to the Center for Responsible Lending, charging $45 on $300 adds up to a whopping 459% annual interest rate, the maximum allowed in California. No wonder 15 states and the District of Columbia have capped interest rates to ban these types of loans.

California, though, has largely stood by, even as the soaring number of payday lenders in the state has surpassed the number of McDonald’s. There were more than 11 million payday loan transactions in California in 2008, according to the California Department of Corporations.

San Francisco and the credit unions are taking an important first step to solve the problem. The new loans will set up cash-strapped consumers to succeed, not fail. You can borrow up to $500, and, crucially, you don’t need to pay it all back two weeks later. You can spread out your payments up to six months. And the interest rate is 18%.

The participating credit unions will offer people opportunities to build their credit scores and take advantage of financial counseling. They worked together through the city’s Bank on San Francisco program, which pushes financial institutions to offer affordable products that work for lower-income consumers.

The creators of Pay Day Plus SF have already fielded inquiries from Butte County, Los Angeles and San Jose from people who want to make similar alternatives available in their communities.

The work’s not done. Because of the vast market for these loans, more financial institutions should step up with better-priced alternatives. And state legislators need to create more meaningful consumer protections, capping interest rates at reasonable levels. When borrowers are forced into loans that drive them closer to collapse, we all lose.

Payday Plus SF, though, is a good start, and that’s a message truly worth putting up in neon for people all across California to read.

Anne Stuhldreher is a senior research fellow at the New America Foundation, a nonprofit, nonpartisan policy institute.