1,000% loans? Millions of borrowers face crushing costs
One complaint about the payday lending industry is that it lacks competition, making it hard for borrowers to shop around for the best terms. Doug Farry wants to change that.
A former TurboTax executive, he’s the co-founder of Employee Loan Solutions, a program that lets employers offer small loans to their workers. Called TrueConnect, the product enables loans of up to $3,000 at an APR of 24.9 percent. That amounts to charges of $120 per year on a $1,000 loan.
To ensure people don’t get in over their heads, loan amounts are limited to 8 percent of gross pay, compared with upwards of 39 percent in some states. Loans, which are made through Minnesota-based Sunrise Banks, are repaid through automatic payroll deductions.
“We made it so our borrowers would be able to repay their loans in small increments spread out over a year,” he said. “That way they don’t get caught in a debt trap.”
Unlike payday lenders, TrueConnect also reports to credit bureaus when borrowers make payments. That can be especially valuable for people trying to rebuild their credit.
A number of public and private employers in California, Minnesota, Ohio and Virginia are now offering TrueConnect, which is designed to be rolled out as an employee benefit and which Farry said comes at no cost to the organizations that use it.
Employee Loan Solutions’ “business model is one we can definitely use in New Mexico,” said Rep. Javier Martinez, a Democratic member of New Mexico’s state legislature who is pushing to crack down on payday lenders in the state. “It’s a safe alternative, and it’s a fair alternative.