Head over on a winter Indiana weeknight to a community meeting, and you’ll hear some intriguing ideas about alternative lending and microfinance. But you don’t have to be in the Midwest to check out small loan options – even if The Guardian has called the American heartland the new microfinance frontier – because chances are that some microlending options exist within your own networks and communities.
Microfinance is increasingly popular, but it isn’t new. These loans that are frequently used in developing countries to help people grow small businesses, or afford equipment and other capital investments, are available in the United States too. They’re designed to solve the problems that arise when borrowers are looking for smaller amounts of money for those business reasons, not really the cost of any unexpected personal expenses. In last month’s blog post, we saw research that finds many Americans lack savings, and are ill-equipped to manage a sudden pricey auto repair, emergency dentist visit or other costly bill.
These scenarios – especially among people without banking access or credit options – leave few options beyond payday loans and similar predatory lending products. A market research report for this lending niche found that nearly half of all revenue in 2015 was tied to customers paying for recurring expenses like groceries or utility bills; according to Pew Charitable Trusts, that’s a truth that defies the industry myth that these borrowers are confronted with a single unexpected event. Either way, they lack options.
All of these dynamics result in more communities, especially since the banking and housing crises, who are looking at ways to meet the need for small, short-term lending products. Among the options are microlending and financial counseling programs created at universities and designed to serve their wider community while creating a win-win experience for students beginning their careers. Lend for America is a good source that explains how that works. They also list member schools in 18 states with programs that offer borrowers small loans, with lower interest rates and longer terms than payday loan providers. Participants, as part of their repayment plans, often set aside small amounts to help reach a savings goal that is available at the end of the loan term – with, say, $500 to help them avoid the problem next time.
There are also small loans available through microfinance programs run by social services agencies, who partner with employers to help low-income, credit-constrained workers receive loans that they pay back through payroll deductions. They offer many of the same features the university programs do, but with the added benefit of enlisting the help of businesses in their communities to support the effort. Most of the providers see their clients pay back these loans in good faith, with very low default rates – which is exactly what Nobel Peace Prize winner Muhammad Yunus and other microfinance lenders around the world have seen. When people are connected to community, they are likely to honor the commitments they make so that they can be a part of turning the funds over and helping others in their own villages.
Personal loan products available through MoneyLend and other reputable online providers are another solution to a short-term problem that helps people sift the payday loans, title loans and other providers. But it’s always a good idea to explore the creative options that may be available to you! In some cities, even neighborhood associations have small loans available to members, as do some trade groups. Even a platform like ModestNeeds.org may be a resource. It works like Kickstarter or GoFundMe crowdfund sites, except that there are application rules and thoughtful guidelines to receive one-time grants that average between $750 and $1,250. These grants are funded by donors, with priority given to low income “working poor” candidates, returning military veterans and others demonstrating real need.
If you’re interested in learning more about microfinance and small-loan products around the world, see the link here for development loan efforts. Or take a look at Grameen America, based on the Yunus model, which works toward financial inclusion around the globe as well as in United States communities.