Originally posted at Christian Post August 26, 2016.

Dear Chuck, 

What is your view of payday lending? It seems like Crown would have some insight on the perils of such loans and whether there are alternative ways to secure a “small-dollar loan” such as through church lending clubs, or some other means.

Considering my options

Dear Considering,

Thanks for the great question. This is a topic close to my heart, and actually, close to God’s heart too.

Payday loans are a bad idea. They should be considered “predatory loans” because too often they lead to a form of servitude for people who get trapped in excessive debt nearly impossible to repay. Usually, a payday loan involves a very short term, very high interest rate, taken on by those who are in financial difficulty without many options. In short, people who are in trouble and desperate for quick cash.

The Center for Responsible Lending explains the “Debt Trap” of payday lending like this, and I quote:

• In order to take out a loan, the payday lender requires the borrower write a check dated for their next payday.
• The payday lender cashes the check on that payday, before the borrower can buy groceries or pay bills.
• The interest rates are so high (over 300% on average) that people cannot pay off their loans while covering normal living expenses.
• The typical borrower is compelled to take out one loan after another, incurring new fees each time out. This is the debt trap.

Taking a look at the terrible cost of this practice, the Pew Charitable Foundation found that a spiral of debt impacts those who take out the loans almost immediately, reporting, “twelve million American adults use payday loans annually. On average, a borrower takes out eight loans of $375 each per year and spends $520 on interest.”

A Consumer Financial Protection Bureau report concluded that more than 80 percent of payday loans are rolled over or followed by another loan within two weeks, and that 15 percent of new loans lead to a chain of at least 10 loans.

The Biblical instructions about usury, which is understood to be high, excessive interest rates, are to avoid taking advantage of the poor and vulnerable. In Ezekiel 18, the prophet describes a righteous man, observing: “He does not oppress anyone, but returns what he took in pledge for a loan. He does not commit robbery but gives his food to the hungry and provides clothing for the naked. He does not lend to them at interest or take a profit from them.”

This is not a warning against making a profit with lending in business. It is a warning against using financial leverage to hurt those with few other options. Proverbs 22:22 puts it like this, “Do not exploit the poor because they are poor and do not crush the needy in court.”

There has been so much concern with the cruel burden of payday loans that the federal Consumer Financial Protection Bureau has begun to crack down on them, leading to another trend that can be just as predatory and dangerous for borrowers – Installment loans. You can think of such loans as going longer than the next payday, but still with often crippling interest rates, and these loans are often marketed to people with bad credit, so-called risky borrowers.

Installment loans also can be targeted to the people who struggle to repay debt. In fact, “citing default rates that often range between 20% and 50%, the National Consumer Law Center said installment loans can present bigger risks than payday loans because they keep borrowers indebted for a longer period,” reports the Wall Street Journal.

So what should be done about this?

A variety of agencies and church groups have become advocates for tighter regulation, zoning restrictions and policy reform. They are making inroads to curtail the worst practices. While this is helpful, the market segment needing immediate cash remains vulnerable. As a general rule, I recommend borrowers seek to escape the trap through education and Christian based alternatives.

There are a number of faith groups offering innovative alternatives such Faith for Just Lending.  Some churches in Pennsylvania have established a program called Grace Period, by working with a local credit union to establish savings accounts that are gifted to the borrower once their loan has been paid back.

Crown has long advised local churches to help those in need of financial help, encouraging congregations to set up a Benevolence Committee to bring in financial coaching, resume writing workshops, even short-term gifts or loans. Crown also has many resources to help churches equip their people to serve those in need. Individuals can take a free MoneyLife Indicator assessment, which will serve as an educational and guidance tool for those who want to learn to thrive. But pastors who want to learn more about how well their members are doing, and what tools would best meet the needs of their congregation, can begin that process with a financial assessment taken as a group, with the individual identities kept private, so that the true needs of a church can be addressed as a whole through a group snapshot of needs and attitudes of those they are serving each week.