I was at the grocery store last night and took a spin down the bottled water aisle.  I counted over ten different brands of water. TEN! That was just for still water, not fizzy fancy mineral water or ultra pure distilled or raspberry flavored “performance” water…just plain old water that you can get for pennies out of the tap.  Why does my grocery store carry ten different brands of plain old water?  Because consumers like choices, they might like the image that goes with drinking a fancy French fizzy water, they might choose bottled water over a soda or their tap water might taste like bog water (as mine does) and prefer drinking water that has been purified elsewhere.  In the end, no one forces consumers to buy bottled water, but if they want it the option is there.

That’s what Ohioans for Financial Freedom are fighting for.  You don’t have to take out a payday loan if you don’t want to.  There are alternatives, someone with an unexpected expense can take a cash advance on their credit card, ask their employer for an advance on their payday, ask their family for help, they could pawn a valuable item, some credit unions offer loans or they could just go ahead and pay overdraft or late fees.  These are all perfectly good options, as is taking out a payday loan and that option should remain available to those that want it.

 

Your Payday Pundit is working on a scoop that nobody in the media has yet picked up on involving the “Better Choice” program recently enacted in Pennsylvania. 

Payday advance lenders are all about free markets and competition because they ultimately bring better value to consumers.  But a close look at the Pennsylvania Better Choice program reveals a scheme that forces borrowers to increase their debt, provides a windfall for participating credit unions, and destroys consumer choice in commercial banking options.

How does it work? 

The Pennsylvania Better Choice program has several requirements, including:

• You must be a member of a participating credit union
• You must pay a $25 application fee
• You must take out a loan for 10% more than you need
• You must pay an APR between 13% and 18% 

Given these mandatory requirements, let’s take a look at one ordinary scenario.  A person needs $300 to fix a broken water heater.  If they want a Better Choice loan, they have to first be a member of the credit union.  If they’re not a member, they can’t get a loan, period.  If they have a savings or checking account at a different bank, they can’t get a loan, period. 

If they really want the loan, they must join the credit union, which means opening a new credit union account, regardless of how many other bank accounts they may have at other institutions.

 

Once that’s done, they sit down to figure out the terms of the loan.  The $25 application fee is added to the loan amount, raising the loan balance to $325.  Then, the credit union compels borrowers to add another 10% of the loan request – $30 for a $300 loan – to the loan balance, making a grand total principal loan balance of $355.  A heck of a deal for someone who only needs 300 bucks.

Now here’s the really interesting part. The additional $30 tacked on to the loan amount is deposited into the borrower’s credit union account.  The borrower can’t touch that $30 until the loan is paid off and the $30 does indeed earn interest.  Once the loan is paid off, the borrower has access to this $30 in their savings account plus the interest earned. Sounds good, right?

Look closer

Payday Pundit has chosen one particular credit union to make this point.  We have nothing for or against this particular credit union, we’re just using it as an illustrative example.

The Riverfront Federal Credit Union offers Better Choice loans with the aforementioned terms and an 18% APR.

http://www.riverfrontfcu.org/BetterChoiceLoan.asp

Now check out their rate of return on a money market savings account.  With a $500 minimum, the money market account pays 1.75% APY.

http://www.riverfrontfcu.org/mon_mar.asp