If an unexpected, but pricy life expense crops up — a car breaks down or a company announces layoffs — nearly three in 10 Americans would be unprepared. And nearly 30 percent lack sufficient “rainy day funds” to cover six months of expenses.
In order to provide an alternative to the high-interest loans offered by predatory lenders, Step Up Savannah — a workforce development and financial advocacy organization — partnered with Consumer Credit Counseling Services and a local credit union in the Savannah metro area to provide a new low-interest, employer-based loan program.
“We all know that there are a million and one emergencies that come up in life,” says Suzanne Donovan of Step Up Savannah. “Most people who are working and are low- to moderate-income residents in the Savannah area are generally not well prepared for anything that’s going to come up out of the normal.”
The Life Line Loan program works with employers to offer small dollar loans between $300 and $1,500 to employees. Borrowers are then able to pay the loan back over a six- to 12-month period via a payroll deduction.
Donovan says that her organization was looking for a new financial product to introduce in Savannah’s county seat, Chatham County, to help the unbanked and underbanked. They were specifically looking for an alternative to products like car title loans, which the organization felt were keeping people in debt. Filene Research Institute, a pro-credit union think tank, had been reaching out to local financial institutions in different cities, pointing to the success of an employer-sponsored small dollar loan pilot in Vermont.
“We were able to, with the assistance of Filene, work with our local credit union and take the shell of what Filene had already been experimenting with in Vermont … and bring it to our friends at the credit union here and got them to agree to offer it,” says Donovan.
“Quite honestly when I first heard about it,” says Robby Glore, from Georgia Heritage Credit Union, “I thought, ‘This is what credit unions are all about.’”
Payments on the small-dollar loans are taken from paychecks and funneled to a Georgia Heritage Federal Credit Union account, specially opened for this purpose. The bank offers a 16.9 percent annual percentage rate for payroll deductions and an 18 percent rage for cash repayments.
“Our repayment [for a $1,000 loan] is about $1,094 dollars — that’s $94 in interest,” says Glore. He explains that a car title loan isn’t an installment, but a 30-day contract. “The fees they have on that for the first month is 25 percent, so that’s $250. That repeats itself for the second and the third month too, so you end up paying $750 and you still owe $1,000.”
The loans are underwritten on the borrower’s debt-to-income ratio, not their credit score. Borrowers with higher credit scores are offered lower interest rates, however. Donovan says that the program was structured for borrowers’ credit scores to only work for them, not against them.
Once the employer-based loan is paid off, payroll deductions continue to go into the credit union account in the form of savings with the option to opt out. “Because the thinking is, once you are accustomed to whatever it might be — that $25 or $50 a month coming out of your paycheck to pay off this loan — you’ve already made the adjustments that you’ve needed to in terms of your income-earning needs in any given month,” says Donovan. “It could be a real help for people down the line. They could find themselves in a situation where they don’t need an emergency loan the next time around.”
So far the largest employers to enroll in the Life Line Loan program in the Savannah area have been the Chatham Area Transit Authority, Hospice Savannah, and Senior Citizens Inc., and the Chatham County Board of Commissioners is expected to come on board shortly.
“I saw an opportunity to help some folks and make an impact,” says Glore. “Hopefully this will help them get on a more financial footing than where they are now, improve their lifestyle and give them that emergency fund after use.”
The Equity Factor is made possible with the support of the Surdna Foundation.
Alexis Stephens was Next City’s 2014-2015 equitable cities fellow. She’s written about housing, pop culture, global music subcultures, and more for publications like Shelterforce, Rolling Stone, SPIN, and MTV Iggy. She has a B.A. in urban studies from Barnard College and an M.S. in historic preservation from the University of Pennsylvania.