Emergency Help: Moving From Handouts to Small Loans

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A Richmond, Virginia pastor, whose church sits in the midst of an economically struggling neighborhood, often gets calls for emergency help.  He believes loans are better than cash assistance.   Says Rev. Rodney Hunter, “We still provide food or clothing when necessary.  But we’re concerned that it creates dependency. We want to help people help themselves.”

The pastor’s solution: small dollar loans provided by a local credit union.  Rev. Hunter, Pastor of Wesley Memorial United Methodist Church, acknowledges that many people struggle to make ends meet. According to a recent study by the U.S. Federal Reserve, approximately half of Americans would be unable to come up with $400 (without borrowing) to deal with a financial emergency. Furthermore, “The people who need the most would rather struggle than ask for help.”

Out of desperation, some people turn to predatory lenders.   In Virginia, for instance, it’s easy to acquire open-ended loans from storefront lenders with no credit check required. These loans, often secured by the borrower’s car title, have an extremely high interest rates: the typical annual percentage rate is 300 and 400%.

Congregations can help their members avoid predatory loans by partnering with a local credit union to secure small loans. Note: the credit union provides the loan, while the congregation offers the collateral. “Churches are not banks and they are not credit unions,” Rev. Hunter says.  Wesley Memorial, along with another Richmond area church, started just such a partnership with the Virginia United Methodist Credit Union, called the Jubilee Assistance Fund.

Four Steps For Getting Started

1. Establish a relationship with the loan officer of a local community credit union. Community credit unions and congregations share this in common: a mission to “serve the neighbor.”

2.  Gain support of the congregation’s governing board. Raising funds for the collateral source will be a critical step. The starting amount, whether it is $500 or $1,000, will potentially grow larger due to added gifts and interest. The fund would not be touched unless someone defaults on a loan, requiring withdrawal from the principle. Once approved, the fund’s availability would be advertised within the congregation.   Wesley Memorial requires that the person be a church member for at least six months before being eligible for help.

3.  Have the congregant apply to become a credit union member and apply for a loan.  Credit union membership usually involves a small deposit ($5.00) for setting up a share account. With membership, the individual may apply for a loan.  The credit union will determine whether the loan is approved.

4.  Develop an agreement between loan recipient and congregation spelling out the provisions of the arrangement. In the case of Jubilee Assistance Fund, the agreement has two requirements:

  • Use electronic direct deposit for payment of the loan.
  • Participate in financial education and counseling, including budget preparation.

(Note that federal law prohibits credit unions from requiring direct deposit, but congregations may require it.)

For Rev. Hunter, the most important thing about the program is that it helps people avoid the danger of predatory lenders.  “It’s educational.  People may ask, ‘What’s a credit score?’  It’s good to for people to learn about budgeting and finance.  The whole point of the program is that people later won’t have to come back for help.”

Photo:  Russellstreet, 8.31.2012.  Flickr Creative Commons.

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