No cost employee benefit helps employees avert crisis
By Jessica Love, associate executive director, Prosperity Indiana
While nonprofits excel at providing work opportunities “that matter,” their employees oftentimes sacrifice salary or additional perks available to those in the private sector.
Most of the time, the intangible rewards of work outweigh the downsides of working for an organization on a tight budget.
But when an unexpected hospital visit or a car repair bill hits, it can often snowball into a full-blown financial crisis. When faced with those expenses and, the lure of fast cash available at a payday loan store may become tempting.
But sadly, this short-term solution often extends far deeper into its users’ pockets than originally promised. Because payday lenders encourage multiple renewals of loans — leading to interest payments frequently many times greater than the original loan amount, the product is generally considered a debt trap. Nearly 76 percent of payday loans are quick re-borrows or renewals.
Payday loan payments consume 36 percent of the typical borrower’s biweekly paycheck. However, the average payday borrower can afford only 5 percent a paycheck, making it difficult to pay the loan off in a standard two-week loan period. In Indiana, the average payday borrower takes out approximately nine loans per year. According to a recent report by the National Consumer Law Center, this recycling of the same debt results in typical payday loan fees in Indiana averaging 382 percent annual percentage rate.
But programs like the Community Loan Center — affordable small dollar loan alternatives — have recently become available.
Seeing the devastating impact of payday lending products, Prosperity Indiana has partnered with Community Loan Center of America to offer a ‘turnkey’ alternative to payday lending. Community Loan Center (CLC) loans are made to employees of participating employers, and borrowers repay through payroll deduction. All funds loaned are provided through a community-based loan fund, offered by a nonprofit acting as a local lender, not the employer.
CLC loans are unsecured and have a one-year term for a maximum $1,000 loan with an 18 percent interest rate and an initial $20 loan fee.
As a result, the CLC employer-based model meets the same short-term lending needs of payday lending without applying the burdensome fees, interest, and repayment period associated with payday loans.
The CLC program also complements other sources of financing by reporting borrower payment history to credit bureaus, which can increase borrowers’ FICO scores. Improved FICO scores help CLC borrowers qualify for other conventional financial products in the future, like credit cards, mortgages and preferred insurance rates.
Highlights and benefits of the program to participating employers include:
- Attracting and retaining employees
- Fully automated loan payments
- Reducing financial stress, resulting in less employee absenteeism
- Fewer payroll advances
- Minimizing “presenteeism,” physically present, but distracted employees
- Zero cost to employer
CLC loans also rarely end in default. Nationwide, the program has originated more than 10,000 loans with a loan loss of less than four percent.
One participating employer in Lafayette is LTHC Homeless Services, a nonprofit that provides housing and supportive services to individuals and families who are experiencing homelessness.
LTHC Executive Director Jennifer Layton said, “As a nonprofit we are always looking for new ways to increase our benefit package to support our staff of 24. Partnering with the Community Loan Center Program was a great opportunity. This program allows my staff to overcome emergent needs as they arise and can assist them with building their own credit. It’s a win-win for LTHC Homeless Services and my staff.”
Prosperity Indiana plans to bring the CLC program statewide by expanding the network of lenders, working with local lenders to recruit more employers to the program and assisting local lenders to assemble operating and loan capital to serve new borrowers. It is currently seeking local lenders to bring the program to Central Indiana and other areas of the state.
If your organization is interested in being a lender, which comes with capital requirements, or becoming a participating employer to provide this free benefit, please let us know.
This program is open to any employer: nonprofit, for-profit and governmental entities. Establishing a stronger case for market demand could aid Prosperity Indiana in finding the right local lender to bring this service to your organization and community.
Jessica Love is the associate executive director for Prosperity Indiana and works with the executive director to provide team leadership for staff. She is responsible for developing and managing organizational systems for Prosperity Indiana to ensure effective management and control. She also provides one-on-one technical assistance to Prosperity Indiana members, informed by her media and grants management background. With 15 years experience in the nonprofit sector, Love’s consulting work focuses primarily on resource development and creating processes and tools for effective management and program compliance.
For more information about this program, please contact Prosperity Indiana’s Assets & Opportunity Network Manager Kelsey Clayton.