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A group of five area credit unions have signed on to a new program in which they’ll partner with employers to offer small cash loans that don’t require a credit check.
Those involved say one of the primary missions of the initiative is steering people away from payday lenders, which have a reputation of creating a cycle of debt that’s difficult to overcome.
“Before you know it you’ve got two or three people you’ve got to pay back,” said Michael Plath, executive vice president of Toledo Metro Federal Credit Union, one of the participating institutions. “That person feels like there’s no way out.”
The Employer Sponsored Small Dollar Loan Program offers loans ranging from $300 to $1,500 to employees of participating businesses and agencies. The loans come from the credit unions, while the role of employers is fairly limited — they verify income and set up automatic withdrawals from the employee’s paycheck to be funneled to the financial institution to repay the loan.
“Our goal is to try and get employers to understand that you don’t have any risk,” Mr. Plath said. “All you get really is good publicity to say we’re offering the program to our employees to have access to more affordable financial products and services compared to what they may otherwise find in the marketplace if left to their own devices.”
The program is organized by the Wisconsin-based Filene Research Institute, a credit union and consumer finance think tank. Filene recently received a $700,000 grant from the Ford Foundation to develop new financial products that reduce debt and increase assets for low-income families.
The employer-sponsored loan program is one of the things it is trying.
“[The Ford Foundation] realized credit unions are really the place to go if you want to go do studies with low to moderate income folks. In our very charter as credit unions we’re dedicated to work with low to moderate income,” said Cynthia Campbell, Director of Innovation Labs at Filene.
Toledo is one of seven markets participating in the program. Filene will gather research on the program for 18 months.
Ms. Campbell said research will focus on the program’s effect on both consumers and lenders.
One thing Filene hopes to calculate is how much money may have been saved by giving consumers a better, less expensive option to come up with cash for unexpected expenses.
Though Ohio legislators attempted to rein in payday lenders with a 2008 law that capped their interest rates at 28 percent, critics say those offering short-term, high-interest loans have found loopholes that allowed them to skirt those rules.
The loans through the credit union program still have a relatively high interest rate — Ms. Campbell said credit unions typically set their rates at 13 to 16 percent — but they’re much lower than payday lenders.
Additionally, if credit unions find a person has a good credit score and lending history, they may be able to offer less expensive loans instead.
Lucas County Commissioner Pete Gerken, who took part in a news conference announcing the program, said the county would participate.
“We want to be able to lead by example. It’s not hard, there’s no risk, it helps your employees, and it’s good for the community,” Mr. Gerken said.
In addition to Toledo Metro Federal Credit Union, ProMedica Federal Credit Union, Toledo Urban Federal Credit Union, Sun Federal Credit Union, and Ottawa County’s Commodore Perry Federal Credit Union are participating.
Organizers say 10 employers have signed on already. They hope to at least double that as awareness of the program grows.