When he needed money, the Manhattan cook went from bank to bank, applying for loans as small as $500—but no one would lend to him because he didn’t have collateral to secure the debt.
“What I used to tell them is, if I had property, I wouldn’t be asking you for a loan,” said the 45-year-old, who spoke through an interpreter about his financial struggles and asked to remain anonymous. “Unfortunately, they would tell me, that’s how banks work. If you don’t have anything, we can’t lend you anything.”
The cook lives in the city with his wife and three children and also supports his mother, who remains in Mexico, the country he left 18 years ago. When his mom became ill not long ago and her costs rose, it became difficult for him to pay all his bills. Desperate, he turned to a loan shark for an infusion of $5,000. The loan shark charged 20% interest each month, the equivalent of 240% a year.
At such a high rate, he could only afford to cover the interest and periodically roll over the debt into a new loan.
Refinance rescue
While attending an English class at a community center, he found out about a loan shark refinance product offered by Neighborhood Trust Federal Credit Union in the city’s Washington Heights section. Through the nonprofit lender, he paid off the $5,000 loan as well as some additional credit card debt by borrowing the needed amounts at a 15% annual rate.
Now he makes monthly payments of $350 to the credit union, less than half what he was paying the prestamista, as this sort of predatory lender is known in Spanish. He’s also putting 2% of his earnings into a savings account while working to pay off the three-year credit union loan.
Charging more than 16% interest on a loan by an unlicensed lender is illegal under New York’s usury law. Even state-licensed lenders can’t charge more than 25% on debts of less than $2.5 million, according to the state Department of Financial Services. But that hasn’t completely eliminated high-rate, short-term loans made to residents by local lenders and over the Internet.
While there are no licensed payday lenders in the state, a quick search on Google Maps shows at least one doing business from a lower Manhattan office and advertising annual rates of over 500%. A 2014 survey of over 33,000 people nationwide shows that about 3% of New Yorkers use payday loans, according to the Pew Charitable Trusts in Washington. And then there are loan sharks.
For people who speak little or no English, don’t have regular work or face other challenges, getting credit or a loan to deal with an emergency can be difficult or impossible. That creates demand for the services of loan sharks and other alternative lenders, even if they are incredibly expensive.
High-priced help
Because of the high cost, most borrowers who go through these lenders can only afford to pay the interest and fees, and usually have to put off paying down the principal. So they typically “roll over” the loans. More than four out of five payday loans are rolled over at least once, and half are extended this way 10 times, with fresh fees charged each time, according to a 2014 Consumer Financial Protection Bureau study.
“People don’t understand,” says Rosa Franco, Neighborhood Trust’s director of lending. “This is short-term thinking.”
In 2011, the credit union started offering its loan shark refinance product to help people get out of debt. It focuses primarily on helping people with decent credit scores who turned to alternative lenders out of desperation. Under the program, clients can borrow up to $10,000 at a 15% annual rate to consolidate their debts.
As an example, Franco says a member seeking to refinance $6,000 in debts would initially be given $1,500 to start paying off that principal. Under the terms of the refinancing, the borrower agrees to put 10% of the savings from payments to the lender into a savings account to establish an emergency fund.
Rewarding good behavior
The borrower could also see a financial adviser at a nonprofit affiliate, Neighborhood Trust Financial Partners, or attend personal finance classes. If the contributions to the savings account are kept up as agreed, the credit union lends more money. Eventually, the original principal will be paid off and the borrower will only be making debt payments to the credit union while building an emergency fund.
Oftentimes, not-for-profit credit unions, which are member-controlled, are more willing than other financial institutions to work with people—even those with poor credit—because their structure gives them more flexibility. Still, programs specifically designed for those trying to refinance high-interest, short-term debts are uncommon. Some borrowers turn to online payday-loan consolidation websites, but those are often as unregulated and costly as payday lenders themselves.
The credit union had about 3,500 members and assets of almost $9 million at the end of last year. Even though it’s lending to a population generally seen as higher risk, borrowers have proven to be good bets.
Conscientious borrowers
“So far the delinquency is nonexistent,” says Franco—fewer than 1% have failed to meet their obligations under the program, she says. “They know that if something happens in the future, they don’t want to close the door on an organization that has helped them in the past.”
Even though the program has a high success rate, it also has its challenges. Because weekly payments are required, employees have to monitor the activity at the same pace, and the workload can be overwhelming.
For the Manhattan cook, Neighborhood Trust has helped ease a crisis that led to sleepless nights and a feeling of desperation. Today, he’s working two jobs and aims to make good on his obligations.
“Because they gave me a chance, I’m going to try to pay it off faster, so that they can keep trusting me,” he says. He’s also taking classes on money management and on starting a small business.
“Now I have much more confidence and I feel like advancing myself and putting more effort into it,” he says. “Because if somebody has faith in you, that gives you faith in yourself.”
Setting an example
Neighborhood Trust’s success with a program that defies conventional lending wisdom begs the question: Could other lenders replicate what it has done?
“I’m not sure how many financial institutions are willing to look beyond the numbers,” Franco says. She notes that loan applicants must be assessed more holistically, including examination of their payment histories, measures they’ve taken to improve their finances and the state of their credit scores.
When banks only consider credit scores, many people can fall through the cracks. Building personal relationships is key to the program’s success, Franco says.
“It says something about loyalty,” she says. “It says something about thinking about the future.”
Shark in the water image via Shutterstock.
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