Not worth the weight
CHARLESTON, W.Va. -- As the number of people who get money through non-bank credit options, including "payday lenders," continues to rise, some advocates are reminding consumers that such deals usually aren't worth it.
"By all means, these types of loans should not be used as supplemental income," said Amanda Tietze, vice president of the Better Business Bureau in West Virginia. "They should be used for emergency purposes only."
A recent Urban Institute study on non-traditional credit use looked at four kinds of non-bank credit lending methods: payday loans, pawnshop loans, rent-to-own deals and "refund anticipation" loans.
From January 2009 to June 2011, the percentage of households where one person had ever used a non-bank credit product rose from 11.8 percent to 14.2 percent, according to the report.
The country was in an economic recession for much of that time, and people who are "normally considered economically advantaged: older, non-minority, better educated, married and higher income" were disproportionately more likely to start using questionable credit, the Urban Institute report stated.
Tietze said the Better Business Bureau recommends people shop around carefully and consider interest rates and other fees before taking out any loan. Tietze suggested checking with local credit unions, or seeking a small loan from a bank.
"If you don't have the funds available on your next paycheck, we are often finding consumers are getting caught in the payday loan trap or cycle," Tietze said. "The loans start stacking on top of each other and once you get into that cycle it is very, very difficult to get out of it and pay back all those loans."
Former Attorney General Darrell McGraw's office sued dozens of payday lenders because their terms violated West Virginia law. But Tietze said some companies allow consumers in states where those types of payday loans are illegal to secure the loans online.
"By the time it is all said and done you are paying 300 percent interest on the amount of money you were originally loaned," she said. "It's really not an economically sound way to fix the problem."
The BBB also recommends people use their local nonprofit consumer credit council service. The group offers credit guidance and budgeting to consumers for little or no cost.
The latest unemployment numbers for August from the Bureau of Labor Statistics showed national unemployment at 7.3 percent, while WorkForce West Virginia's data showed the state's unemployment rate at 6.3 percent.
Stephanie Klein, director of consumer lending for NetCredit, said there is a need for new products to fill the credit gap for those consumers "who have really been left behind by the banks." She said the company specializes in small-short-term-personalized loans.
Last week Klein participated in a panel discussion with the Financial Services Innovation Coalition in Washington, D.C. on how companies could use technology and analytics to bring a better product to market to help consumers in need of credit but don't qualify for traditional bank-credit.
"We are serving a high-risk customer but are still able to offer products at a rate not too far from what you might find at a bank," Klein said.
NetCredit uses in-house technology to assess each customer's ability to pay back loans instead of just looking at a credit score, Klein said.
Not all customers receive the same interest rate on their loans. Klein said the most qualified customers receive a 35 percent rate.
"We're definitely seeing a lot of interest and discussion from a variety of regulatory groups, including consumer research groups that do understand the need for credit and are really interested in working on figuring out how to solve this problem," Klein said.
The company has been in business for about a year and half serving 10 states. NetCredit does not do business in West Virginia. The state Senate enacted the Payday Lending Act in 2006 outlawing the practice. The bill noted that "payday lenders typically charge effective interest rates over  percent per annum."
Customers chose their loan amount and time to pay back the loan between six and 36 months.
"This gives the customer the ability to better budget and afford to pay back the loan," Klein said.
She added the company also reports when customers pay back loans so they can re-build their credit and return to traditional lending methods.
"It satisfies the immediate credit need while also building credit for the future," Klein said.
Klein is hoping for a federal charter to allow NetCredit and other alternatives to payday lending and short-term loans to operate in more states.
"We are definitely seeing that there is a lot of need in the 10 states that we have customers in."
As the Urban Institute's report states, "Attention should focus on ways to encourage product development in the mainstream financial services market, to better attract and serve the more credit-worthy non-bank clients and thus enable these households to access short-term credit more affordably." Reach Caitlin Cook at firstname.lastname@example.org or 304-348-1211.