Alternatives to Houston Payday Loans Arise
Inside Subprime: March 11, 2019
By Lindsay Frankel
A nonprofit microlender dedicated to increasing financial independence for women, recently expanded to Houston, where it’s giving female entrepreneurs the financing they need to build small businesses. Since founded by Nobel Peace Prize recipient Muhammed Yunus in 2008, the microlender has issued more than $1 billion in loans to female business owners in 21 locations across the country.
The microlender had planned to expand to Houston because of the high concentration of underbanked and underemployed women of color and their families. The CEO of the lender noted that more than half of people living in poverty are single mothers, most of them women of color. This also describes the typical profile of a payday loan borrower.
The microlender also had its sights set on Houston because of its entrepreneurial culture. But Houston moved up the list of cities for expansion when Hurricane Harvey hit. Since expanding to Houston, the organization has helped 35 female residents through its program.
“All of this, to me, is just about giving an equal opportunity,” the CEO said.
Microlending is rooted in the concept that access to small loans and financial education assists people in getting out of poverty and establishing financial independence. As part of the microlender’s program, participants are required to take five days of training in financial literacy prior to getting a loan. They also receive weekly coaching and share ideas with other female business owners. And the program adds a layer of accountability by requiring each woman in the group to pay back her loan before any of them can receive a second one.
“It is that social capital and financial literacy training, as much as it is the loan capital itself, that makes the program successful,” the CEO said.
Such microloans are typically a much safer alternative to merchant cash advances, which have been called payday loans for small businesses. But critics point out that microloans don’t decrease poverty levels across the board.
“It can help some people, but it is not a transformative mechanism,” said Farhan Majid, with Rice University’s Baker Institute for Public Policy. “One needs to really provide some complementary services to really make microcredit more effective.”
The microlender says it provides these services, which include financial education that has positively impacted participants’ credit scores and health education covering topics ranging from nutrition to domestic violence. The 113,000 women that received funds from the organization increased their annual income by $1,500 on average. The microlender also sees an astonishingly low default rate. 99 percent of loans get repaid, and about three quarters of borrowers go back for another loan to further grow their businesses.
And other benefits to borrowers may be hard to quantify. The microlender issued 16 loans to Susana Ugalde, 42, when her business was off to a rocky start. The loans helped her to invest in her business, hire employees, spend more time with her family, send her son to college, and even pay for the fees it took to become a U.S. citizen.
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