Short-term Low-interest Loans

Many families struggle with keeping a balanced budget every month.  Sometimes this is because of poor money management, but it is also due to emergency crises that are difficult to plan and save for like unemployment or major appliance failure.  Breaking the budget is a costly problem. Overdraft fees, late fees, poor credit scores and lack of access to affordable credit are all outcomes in not meeting a budget — which can turn an everyday event into a family cataclysm.  I believe the city should work to structure a loan program for all households to help them meet their emergency needs and protect them from the pitfalls brought by a lack of savings… giving people some flexibility in their budget. 60% of households don’t have $1000 in savings. This is a program imagined to be of benefit to all of Richfield by providing access to low interest short term credit.

The city needs to be protected from losses in the structure of the program. Only about 8-10% of household consumer credit is in default, which bodes well for the potential success of such a program. We know default is a relatively rare event because banks make a profit and most people cover their bills most of the time.

Proposal

  • Every household be provided access to a maximum loan of $1000 per adult;
  • No interest in the first three-six months, with interest after that just large enough to cover the expenses of the program thereafter. Interest charged would be based off of credit rating;
  • City underwritten, Credit Union/non-profit administered;
  • All account holders must receive 3 hours of basic financial education or consultation to help address any chronic budget concerns;
  • Those who don’t pay back in a timely fashion would be excluded from further access to the program.

Sources:

Savings rate information

Credit default rates