With Payday Loans Burying Borrowers, Community Tries Alternatives Some experts say there are better, cheaper alternatives for getting small dollar loans than payday loans, which are often cash sources of last resort.

With Payday Loans Burying Borrowers, Community Tries Alternatives

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Regulators proposed new rules for payday loans earlier this month. Those are small, short-term unsecured loans not always actually linked to payday. These new rules would limit the term of the debt and require assessing the ability of the borrower to repay. Because of their high cost, many say payday loans should be considered only as a last resort. As NPR's Yuki Noguchi reports, there are some alternatives.

YUKI NOGUCHI, BYLINE: A couple years ago, an elderly man came to pastor Wes Helm at Springcreek Church in Garland, Texas, and opened up about his financial troubles. In the man's budget, Helm noticed a major monthly expense. A payday loan fee three times more than the amount of the loan itself.

WES HELM: And I thought this can't be - this can't be legal. And our church started digging into it and looking into it in our community and found not only was it legal but that they were all over the place, that dozens and dozens of our families in our church had lost thousands of dollars in fees. They had lost vehicles, sometimes even homes.

NOGUCHI: Helm and other faith groups got city officials to pass stricter payday loan laws. In a few months, his church also plans to offer small personal loans to parishioners at 4 percent interest. But Helm hesitates to call them payday loan alternatives.

HELM: If you have somebody that's robbing people in your community, you don't need an alternative to robbery.

NOGUCHI: He says the program will require financial counseling. He hopes it will expand beyond the church and that local employers will start programs of their own for workers.

HELM: If somebody gets into a payday loan or a title loan and they lose their car, they can't go to work.

NOGUCHI: Pew Charitable Trusts estimates 12 million Americans use payday loans every year. They're designed to be very short-term. But they often roll over into new loans because borrowers can't pay them back. The average loan is for $375, rolls over into new loans for five months and racks up $520 in fees and interest payments. Payday loan users aren't necessarily good candidates for typical bank loans, says Greg McBride, chief financial analyst for bankrate.com.

GREG MCBRIDE: This is not a consumer that can just whip out a credit card or tap their home equity. These are oftentimes consumers that have little in the way of other assets. They have poor credit or no credit in many cases. And even documenting income can certainly be a challenge in these cases.

NOGUCHI: Over a decade ago, Todd Hills tried out the payday loan business.

TODD HILLS: Once we got in the business and really watched how it actually works, what we learn was the customer never gets out of debt.

NOGUCHI: Within six months, he shut down the payday loan operation and offered those customers his own alternative. He converted them to pawn loans, which he says were less damaging and far easier to pay off. Hills now runs online pawn store pawngo.com. Jim Chilton is founder of The Society for Financial Awareness, a nonprofit education group. He says people should consider unconventional options, like refinancing their car or asking a family member to take out a home equity line of credit, borrowing that money and making their monthly payments for them. He also counseled several cash-poor divorcees.

JIM CHILTON: You know what I told them to do? Get a boarder and have someone help pay their rent. And they all said, I don't want to do that. I said, I didn't say anything about want.

NOGUCHI: The root of the payday loan problem, Chilton says, is poor budgeting and planning.

CHILTON: People that plan are managing their money. Their money is not managing them.

NOGUCHI: Diane Standaert directs state policy for the Center for Responsible Lending. She says many payday borrowers turn to alternatives only after they get in trouble with payday loans.

DIANE STANDAERT: They think by the time people utilize their options they're trying to get out of a very difficult situation from a loan that is essentially designed to be nearly impossible to escape.

NOGUCHI: Yuki Noguchi, NPR News, Washington.

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