Let’s face it, payday lending is a pervasive, persistent, and predatory scheme that is run by fringe lenders, intent upon making as much money as possible from consumers that lack affordable credit options. The industry claims that they exist because the mainstream (i.e. banks and credit unions) either won’t or can’t serve a segment of the public in need of small-dollar loans. From a market-based perspective, they’re right. Banks and credit unions, by and large don’t offer the types of products that can meet the short-term credit needs of individuals who lack a strong credit profile. However, times are changing.
Prosperity Connection, a 501(c)3 nonprofit whose mission is to increase the financial capability of its clients through free financial education and the provision of affordable financial services, has created a market-based solution to compete head to head with payday lenders. Our answer, RedDough Money Center, is a social enterprise that was launched in March of 2016 in Pagedale, Missouri.
While traditional payday lenders charge, on average, 452% APR for their $500 or less loans, RedDough Money Center charges customers, all-in, 36% APR. Regarding repayment terms, traditional payday lenders expect full payment within two weeks. RedDough Money Center offers consumers four to six months for repayment.
What does that really mean? The average payday loan in Missouri is issued for $310. With traditional lenders at the 452% APR average rate over a six month repayment period, the consumer repays a total of $821.30 ($511.30 in interest). At RedDough Money Center, the consumer repays a total of $343.35 ($33.35 in interest) over six months. Even as payday lenders in Missouri begin the process of moving their product to installment loans with longer repayment terms, will they be inclined to give up their profit margins? We think not.
On every objective measure, RedDough Money Center is more consumer friendly; we’re driven by mission rather than profit. Our approach is holistic because we incorporate referrals to our free financial coaches, connections with mainstream banks and credit unions, and utilize consumer friendly collection practices that are constructive rather than abusive.
Simply put; our goal isn’t to fleece consumers, but rather to offer an alternative to expensive small-dollar loans in the marketplace.
We’ve found throughout our first year of operations that RedDough’s short-term loan resonates with customers. In 2016 we issued 492 loans for approximately $215,000. The average balance per loan in the portfolio was $313. Additionally, as of the end of last year, our defaults/charge-offs stood at 6.2%. While charge-offs are never welcome in mainstream banking, RedDough Money Center is beating the traditional payday loan default/charge-off rate of 33% (Center for Responsible Lending).
In the spring of 2017, RedDough Money Center will expand by opening its second location in South St. Louis at the intersection of Oregon and Gravois (near Jefferson). And while we face significant challenges as we work to build scale, we knew this journey wouldn’t be easy. Considering that few others have stepped forward to offer small-dollar alternatives, we see an ever increasing opening to provide value to the market by building this social enterprise, which will be capable in the long-term of not only sustaining its own operations, but growing to meet the short-term loan needs of the entire region.
As we begin 2017, Prosperity Connection offers this call of action to the corporate and banking sectors of St. Louis. Put an end to predatory, short-term lending in St. Louis by strategically investing a portion of your philanthropic dollars in Prosperity Connection’s efforts at RedDough.
Top three reasons to invest in RedDough Money Centers:
- As RedDough Money Center builds its base of customers and revenue, we won’t ask the corporate and banking sector for future grants. Our revenue will allow us to grow organically.
- RedDough Money Center can provide objective, data-driven results to demonstrate our progress and impact to the community.
- As RedDough Money Center grows, so too will our ability to support free financial education through our network of Excel Centers (financial education facilities), staff, and volunteers.
RedDough Money Center operates on margins measured in empathy and pays back dividends in the form of social good and economic prosperity for our customers.
Imagine a world in which a network of RedDough Money Centers succeed; the community will have expanded access to affordable financial services and free financial coaching, while traditional payday lenders will finally be faced with real market competition. The local economic impact will be in the millions of dollars for increased household and community wealth.
We stand ready to change the face of predatory lending in St. Louis by competing head to head with payday lenders. Join us today to support these efforts so that all St. Louisans have an equal chance to access affordable credit.
Paul Woodruff, Executive Director of Prosperity Connection