Across the country state legislators are lashing out at payday lenders because communities are being exploited and severely indebted. But what can we do to create viable alternatives to payday loans.
Let’s take a look at some possible options:
- Second chance bank accounts. Many debtors who depend on payday loans are unbanked. Helping the unbanked begin to establish relationships with legitimate banking institutions could be the first step to breaking the payday loan cycle.
- Low-cost short-term loans. Banks have traditionally avoided offering short-term loans to low-income families but offering these types of loans could be profitable to banks and beneficial to communities. The loans could be issued with a financial literacy class requirement. The reality is that many families are taking out payday loans because they don’t know any other way to make it from one paycheck to another.
- Automatic savings plans for low-skilled workers through their jobs. Many low-income families are unbanked and dependent on payday loans because they do not understand the banking system and in many cases fear it. Making it easy for low-income workers to save by setting up automatic savings accounts via their jobs, could make banking more enticing in the same way that many 401k automatic deposits encouraged more Americans to began save for retirement.
- Finally, we need to make sure that low-income Americans who are dependent on payday loans understand that the need to take out these loans is a sign that they are in financial trouble. Letting them know that they can discharge or repay their debts in bankruptcy could prevent more individuals from taking out payday loans in a fruitless attempt to stay afloat financially.