Alternative Financing Does Not Have to be Predatory
By Tammie Hoy Hawkins
It is no surprise that there is a large part of the population that does not have strong relationships with traditional financial institutions (banks or credit unions). Look no further than the recent Covid-19 relief program, the Paycheck Protection Program (PPP), where story after story pointed to business owners, particularly minority businesses, unable to access the PPP because they did not have strong banking relationships.
Even before the pandemic, low-income communities and individuals have experienced disproportionate access to traditional financial products. In South Carolina, 26.1 percent of the population is considered unbanked or underbanked, despite a large need for credit or financing (Prosperity Now SC Scorecard).
Alternative lenders and finance companies, like payday lenders, auto title loan companies, buy-here pay-here lots, and check cashing places are common options for individuals with poor credit, no credit, or lack of a traditional banking relationship.
Unfortunately, many of these financial alternatives charge a high price for their services. In fact, many individuals or small businesses end up in a worse financial situation position due to extremely high interest rates (up to 300 percent) and unfavorable terms, or they end up trapped in a loan refinancing pattern, leading to more debt.
In South Carolina, alternative finance businesses are located on almost every main thoroughfare, particularly in lower income communities or “banking desert” areas. Predatory practices take advantage of underbanked clients by touting their speed, convenience and minimum requirements.
It’s true, lending is risky. However, the cycle that predatory practices have created has caused many who have minimal education on finances, a low credit score, and a lack of understanding of all the components in a loan to become victims of loans they cannot afford. The need for more education and increased affordable alternatives is apparent.
Community-minded, lower cost solutions like Community Development Financial Institutions are crucial. CDFIs can be traditional banks, credit unions or loan funds, but in all cases, they are mission driven and community focused; many are also non-profit organizations.
These community-based lenders help support communities by investing in financially underserved or underrepresented individuals, small business owners and communities that may not be served by mainstream lenders. The current CDFI industry can be traced back to1970s, as activists moved to counter banks’ redlining practices and redirect capital back into urban areas by forming community-controlled banks.
Certified and funded in part by the CDFI Fund at the U.S. Treasury, CDFIs look at more than just credit, taking a dive into collateral, character, capacity, repayment history and more. To support borrowers in their financial journey, CDFIS view lending through a lens of grace, understanding that “life happens,” and, most importantly, CDFIS pair up extensive personal and business financial coaching to help develop a financial plan for borrowers - not just for one decision but for future credit needs and financial stability.
Depending on the CDFI, available financial products could include consumer, small business, mortgage and/or commercial loans. CDFI banks and credit unions tend to have a full array of financial products and coaching, while loan funds may specialize in affordable housing and/or small business lending. Some also offer small-dollar consumer loans as an alternative to payday type lenders.
So why have you not heard of these mission lenders? In South Carolina, there are approximately 12 of these organizations. Several banks and credit union CDFIs, like Optus Bank, Security Federal, Carolina Foothills and Self-Help Credit Union, offer full-service banking and depository services in addition to loans with a focus on serving low-income households and communities. Loans funds like CommunityWorks, SC Community Loan Fund and the LDC offer specific loan products and coaching services for small business owners, individuals and affordable housing.
These organizations are mission-based, focused on promoting community development in distressed urban and rural communities by increasing the availability of credit, investment capital and financial services available with a keen focus on financial coaching. These organizations offer lower interest rates than predatory practices, have more flexible underwriting and provide extensive financial coaching.
Although there are over 1,000 CDFIs across the country, they may not have the financial capacity or lending capital of a traditional bank. Thankfully, in many cases, CDFIs partner with traditional financial institutions to help individuals and small businesses build a financial track record.
Find a CDFI in South Carolina, visit https://ofn.org/cdfi-locator.