Lenders Offering Alternatives to Payday Loans for People with Poor Credit

Inside Subprime: March 18, 2019

By Lindsay Frankel

Community Development Financial Institutions are issuing second-chance loans to borrowers with bad credit who might otherwise be tempted to use payday loans or other high-interest financial products, MarketWatch reports.

One of these CDFIs, was the recipient of a $5.5 million award from the Wells Fargo NEXT Awards for Opportunity Finance for expanding access to manufactured housing mortgage loans. The award recognizes financial institutions that find innovative ways to meet the needs of underserved communities.

Almost 700 families have received mortgage loans through the CDFI. Brenda Woods was one of the many people who benefited from the program, receiving a second-chance loan to buy a replacement home after being denied a loan from her bank.

“The [CDFI] made our dreams come true in more ways than one,” says Brenda Woods. “We own a gorgeous new home, our electricity and heat costs are much lower, and Larry, who battles Lymphoma, won’t have to shovel the roof in the winter.”

One of the ways CDFIs are making an impact is by issuing loans to borrowers that might be considered by larger financial institutions to be too risky. The commitment to serving low-income populations allows CDFIs to extend credit to borrowers who wouldn’t typically meet the income requirements of other lenders. And while second-chance loans usually require a credit check, borrowers with bad credit shouldn’t be deterred.

CDFIs will also look at how borrowers have stayed on top of utility bills and rent, an aspect of creditworthiness that doesn’t show up on credit reports and is usually ignored by traditional lenders.

CDFIs are also able to make small-dollar loans deemed unprofitable by larger financial institutions. Borrowers with bad credit often turn to payday loans, which carry annual interest rates of almost 400 percent on average. The second-chance loans offered by CDFIs are a much safer alternative, providing borrowers with lower interest rates and more flexible repayment terms.

Furthermore, CDFIs provide education and assistance in understanding the terms of the loan. The support helps to minimize the chance of default.

Second-chance loans have been working for lenders, with net charge-off rates under 1.7 percent, and have had a positive impact on low-income borrowers across the country.

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