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An Alternative to Payday Lenders

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We've all seen them. Neon signs advertising fast cash and instant money on so many street corners in our low-income neighborhoods. In the United States, there are more than 23,000 of these payday lending loan stores, more than Starbucks and McDonalds combined.

But, it wasn't until I truly delved into how these fast cash operations take advantage of people in need that I began to understand the impact payday lenders have on our poorest communities.

With interest rates as high as 400% APR and a two-week loan term that does not give much of a chance for the loan to be repaid on time, payday loans trap mostly low-income borrowers in a cycle of debt. On average payday loan customers are paying back $800 on a $300 loan, costing consumers more than $4 billion in predatory fees each year.

For many people with low or no credit scores, payday loans offer the only means of dealing with a financial emergency. Sometimes people really do need their paycheck before payday, today more than ever. But a payday loan company is not the solution.

So San Francisco set out to find an alternative to predatory payday lenders.

We convened the City's credit unions and asked them to work with us to find a solution. Together, we developed a new program, Payday Plus SF, an alternative small dollar loan with a maximum interest rate of 18% APR.

Payday Plus SF is latest in a series of successful financial empowerment and financial literacy programs spearheaded by San Francisco Treasurer José Cisneros. This program builds on an initiative the Treasurer and I launched three years ago called Bank on San Francisco, which has helped more than 45,000 thousand unbanked San Franciscans into checking accounts. Seventy other cities and states across the country are already replicating this program locally. And this week, I met with Treasury Department officials in Washington to talk about replicating Bank on San Francisco on a national scale.

Last month, we launched the Payday Plus SF program at 13 San Francisco credit union locations. This first of its kind program is already showing results.

We created Payday Plus SF to help people like Mark Laws, a low-income San Franciscan who found himself in need of emergency cash. If you are like Mark and can't get a credit card and are living paycheck to paycheck with no savings, a financial emergency can be devastating.

In Mark's case, the unexpected death of his mother left him scrambling for the funds to attend her funeral. Even after approaching family and friends, he still needed a few hundred dollars for funeral and travel expenses. Mark walked into a payday lender and walked out with the $250 he needed. Two weeks later when the loan was due Mark could not afford to pay. Instead, he went to another payday lender and took out another loan to pay off the first -- and so on and so on.

Unfortunately, Mark's story is typical -- 99% of payday loan borrowers are unable to pay off their loan within the two-week term. The typical California payday borrower will take out 10 loans in a year before they are finally able to repay the original loan.

Mark is now one of our success stories -- he took out a Payday Plus SF loan, paid off his debts and is now rebuilding his credit as he makes reasonable monthly payments at his local credit union.

We may be the first City to do this, but I know we will not be the last. Predatory payday lenders are a national problem. But with no cost to taxpayers, Payday Plus SF shows what can happen when elected leaders, neighborhoods and the financial community come together to help low-income families in dire, but temporary, financial straits.