Newswise — After Dorothy Johnson's grandson, Lamar Keitt, was in a serious automobile accident that left him in a coma for a week with punctured lungs and broken legs, hips and a jaw, she wanted to help with his treatment. That meant Keitt and his mother would need to move to Texas — quickly, while a coveted space in the program was available. And that required money.
Johnson, 65, and retired from the Veterans Administration Center in Dayton, applied for a loan but didn't qualify. She could have turned to a payday lender, which provides single-payment, short-term loans, usually ranging from $100 to $500. But according to a 2000 survey by the Consumer Federation of America, the annual percentage rate on a $100, 14-day loan from a payday lender ranges from 195 percent to 1,092 percent.
Instead, Johnson turned to Day Air Credit Union and received a Salary Advance Loan, a new program developed by the University of Dayton with three Dayton-area credit unions — Wright-Patt Credit Union, Day Air Credit Union and CODE Credit Union — as an alternative to the potential negative financial impact of payday lenders on consumers.
"In our area, these cash advance places are all over the place, and people get loaded up with debt," said Scott Rutherford, president of CODE Credit Union. "They run themselves so tight financially that when there's an unforeseen event, they have no cash available."
Millions of Americans — estimates range from 11 million to 30 million — use these payday advance, or check-cashing, lenders. However, critics allege such lenders lead to unmanageable debt for many of their borrowers, most of whom are low- to moderate-income Americans.
Under the Salary Advance Loan Program, credit unions offer members loans with a $250 initial credit limit, which can be raised to $500 with a strong repayment history. There is a $35 annual fee to participate, and the interest rate for the loans is 18 percent with a 30-day repayment term. All loans must be paid in full before a borrower can receive another loan.
"A lot of people just can't believe there's an alternative that's so much less expensive than the payday lenders," said Bill Burke, president and CEO of Day Air Credit Union. "This program really is targeted at people who have a good repayment history but are living paycheck to paycheck, which I think is a fairly large number of people."
The impetus for the program came a few years ago when Brother Victor Forlani, S.M., management lecturer in UD's School of Business Administration, was working with Dean Lovelace of UD's Raymond L. Fitz, S.M., Center for Leadership in Community and Dayton City Commissioner on similar problems with predatory lending. Forlani held a meeting with credit union executives to see what might be done to address what he and Lovelace saw as the growing problem of people falling into debt due in part to payday loans. UD students researched possible solutions and, together with the credit unions, came up with a pilot program. Wright-Patt Credit Union launched the program about a year and a half ago.
Doug Fecher, president and CEO of Wright-Patt Credit Union, said approximately 2,000 members have taken salary advance loans. "Members seem to love them," he said. "They pay a fee of $35 per year, where they might pay that much every month at a payday lender."
Because the loans are short-term, a credit union may earn less than $2 on a salary advance loan — perhaps not enough to even cover administrative costs, said Dave Shoup, director of research and information for the Ohio Credit Union League.
Yet Fecher said Wright-Patt Credit Union is covering its costs incurred from the program, and participating credit unions are currently meeting with other credit unions to inform them about the program and attempt to bring them on board.
Besides, profitability is not what motivated the University and credit unions to develop the Salary Advance Loan Program. It combines UD's Catholic, Marianist tradition of community service with the credit unions' mission to help working people save money and manage their finances.
"This helps fulfill part of our mission," Rutherford said. "We feel like we're doing people a service, and we felt by offering members a product to get them off the payday lender cycle. This is exactly what a credit union should be doing. "¦ My dream is that, if all credit unions in Dayton offered this program, there might not be any reason for anybody to go to a payday lender."
Forlani and the credit unions hope to further reduce that cycle by expanding the program to include financial counseling for members who use the Salary Advance Loan Program.
"To just give people 200 bucks is not going to do them any good in the long run," Forlani said. "We want to empower them to manage their finances."
They'd also like to see the program expand throughout the state — and beyond — a goal Shoup said may be possible if the credit unions show it's successful.
For Forlani, that success extends beyond the credit unions and into the communities they serve. "The more you have people who are financially stable, the better off we all are," he said. "We hope to put some lenders on notice that we're going to be out there fighting you — that charging an excessive interest rate is wrong."
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