Many people need a helping hand once in a while. The latest United Way study on economic insecurity says that in 2014, more than a third of Hoosier families were just one major, unexpected expense away from financial crisis. In Fort Wayne, 44 percent of households fell into that category.
Senate Bill 245 is ostensibly designed to help people of limited means cope with sudden expenses by allowing so-called "payday loan" institutions to offer small, long-term loans at extremely high interest rates. Now, payday loans are limited to a maximum of $605 and must be repaid within two weeks.
Public outcry moved the legislature to kill similar legislation last year. But the new bill features even less savory deals.
Authored by Sen. Travis Holdman, R-Markle, Senate Bill 245 would allow payday operations to offer loans between $605 and $2,500 for up to two years.
"They talk about a 20 percent interest rate per month," said Steve Hoffman, CEO of Brightpoint. "But nobody else uses that. They all use annual percentage rates." With an APR of 240 percent, Hoffman said, "that means $9,600 in interest on a $2,500 loan over a two-year period."
"Depending on the amount that would be borrowed under the ‘long term small loans’ bill," the Indianapolis Star reported Monday, "the APR would be from three to five times higher than the threshold to trigger a felony loan-sharking charge."
"I understand the demand," David Nicole, president and CEO of United Way of Allen County, said in an interview Monday. But, he said, taking a high-interest loan is a recipe for more financial hardship.
"Someone gets into a situation, they get a loan and they never get out," Nicole said. "They get a loan, and they get another loan to pay that off." That spiral, he said, sets consumers up to fail.
Hoffman, who hopes to be able to testify against the bill in a committee hearing next week, agreed. Such loans would be "tremendously damaging to anybody that gets one ... If you suddenly get a $500-a-month payment for two years, how are you going to maintain anything else?" he asked. "We’re forcing people onto government assistance, food stamps."
There are better alternatives.
Brightpoint partners with employers to offer more affordable 12-month installment loans through a Community Loan Center created with assistance from the JP Morgan Chase Foundation. Federal credit unions are also allowed to offer short-term loans at lower rates.
But "cash does not resolve the issue," Nicole said. "Cash puts a Band-Aid on it."
Calling 211 in Allen County will connect those in need with guidance and alternatives provided by a United Way staffer.
"There are a number of resources in the community," Nicole said. "The assistance depends on what the need is."
People who take exorbitant loan deals are usually succumbing to fear, Nicole said, and "panic leads to poor decisions."
If someone is seeking help because he or she has gotten a phone call from a debt collector demanding a payment, "the first thing is we’re going to help them back up a couple of steps," Nicole said. There may be other ways to pay the debt, such as filing for a tax refund. Or the 211 staff can help the caller connect with a debt-consolidation or consumer-credit-counseling service.
The answer, he said, is "helping families not get into a debt cycle." That involves helping people gain more financial literacy.
There are probably ways the legislature could do more to support those efforts. But first, it should kill SB 245, which is precisely the wrong way help struggling Hoosiers meet their bills.