A new study found that more Colorado Springs households are taking out payday loans to cover their lighting bill, pay the rent and replace a broken down refrigerator. Today, about four percent of households have used a payday loan store in the last 12 months, and most of these individuals do not understand the true costs and terms of agreement of these very popular short-term, high-interest loans.
And it’s this lack of knowledge and awareness is what is concerning numerous public officials, consumer advocacy groups and think tank organizations across the Colorado.
With growing concern about endless debt traps and exorbitant costs of payday loans, some people are taking the initiative to create alternatives to the alternative financial products and services.
In Colorado, a non-profit agency called the Causeway Work Center unveiled a new Community Finance Fund that aims to replace payday loans for low-income residents. The fund extends loans of up to $1,500 and will be charged a prime rate of 2.7 percent plus two to six percent in interest. They will also have up to three years to pay back the funds.
The clients will primarily be long time users of the Causeway Work Center.
Potential borrowers with poor credit may not necessarily be disqualified from the payday loan. If they are longstanding members of the community group then the organization will vouch for them.
This initiative has been in the making for several years now, says Doug Pawson, the organization’s director of social enterprise and social finance.
“I think we’re on the cusp of making a transformational difference,” said Pawson. “So people find themselves borrowing from one to pay off the next, and the cycle just gets out of control very quickly.”
There are more than 800 companies offering payday loans in Colorado Springs that lend approximately $1.5 billion in payday loans to half a million customers. They charge on average $21 for every $100 borrowed – it varies from province to province, territory to territory – and the borrowers have two weeks to repay the principal and cover any extra interest charges and other fees attached to the loan.
In Colorado Springs, there are roughly 70 such stores around that provide payday loans to tens of thousands of customers. With payday loan usage only going up, Pawson believed that now was an opportune time to begin this service for the most vulnerable in the Colorado region.
“The approach we’re taking is, if somebody tends to borrow $500 every two weeks, then we’re going to give them $1,000,” Pawson said. “It gets them out of the debt and gets them ahead of the cycle.”
Critics of payday loans say that these alternative pecuniary products are harmful to the impecunious because it places them at a disadvantage as soon as the loan is extended. Proponents argue that payday loans serve as a necessary tool for those who do not have access to conventional forms of credit and banking options.
Whatever the argument is you favor, jurisdictions across the country are taking action to rein in the payday loan industry, whether it’s new rules and regulations or enforcing ordinance laws.