When Timothy’s mother fell ill, he turned to payday lending to quickly borrow $1,000 to send home to her in another country. But Timothy soon got caught in a long-term cycle of debt when, two weeks after securing the payday loan, he couldn’t pay it back in full as required, and triple-digit interest was applied. He ended up paying $2,400 in interest on top of the loan.
“Timothy’s story is not unique,” notes First Calgary Financial president Shelley Vandenberg.
People living on a low income like Timothy often find themselves in this situation when an emergency or other sudden life event occurs or even when they need to meet basic needs like rent.
But First Calgary Financial, in partnership with the community-based charity organization Momentum, is piloting an alternative lending option for small loans, with the intention to grow assets of citizens and enhance the local economy and community.
The Cash Crunch Micro Loan had a soft launch in April, offering loans of $750-$1,000 paid over 12 months at 12 per cent interest. The pilot project aims to distribute $75,000, equating to about 75 loans, and 28 have already been created with strong repayment to date.
“Results so far are promising and the potential actual financial impacts for people living really stretched with their means is huge,” says Momentum community relations director Carolyn Davis.
She points out that people living on a low income save significant money with Cash Crunch compared to a payday loan – which typically rolls over if not totally repaid in a matter of weeks and annual interest of nearly 600 per cent is charged. It’s estimated the pilot project would save about $300,000 on 75 loans of $1,000 at 400 per cent interest.
“If we can transfer that (payday) interest payment to return to the pockets of low-income earners they will be better able to meet their needs, they’re less likely to enter crisis and probably they’re going to spend that money locally so that’s a boon to our local economy,” Carolyn says.
“The best thing that’s happening is people get out of debt sooner,” Shelley says. “We’re able to put money back in their pockets and these hardworking people can provide for their families and themselves.”
Developed over 18 months with learnings from a similar initiative by Vancity credit union in Vancouver, the Cash Crunch Micro Loan pilot project flows from a four-year collaboration between Momentum and First Calgary Financial to understand possible synergies and how they might partner. Carolyn says they share a mutual interest in caring for vulnerable members of the community.
Among them are people living on a low income, from seniors to students to individuals working full-time.
These people can be living in poverty and Momentum believes poverty is a solvable problem, Carolyn says.
“Our mission is to essentially help people living on a low income to increase prosperity,” she says, adding that means building assets. And that becomes more possible when significant debt payment, like that associated with payday lending, is not an issue.
“We also inspire the development of a local economy that has opportunities for all, and so this (pilot project) is really doing both of those things at once,” Carolyn says.
As a credit union, First Calgary Financial understands it has a unique ability to play a lead role in helping Calgarians get out of poverty and on a sustainable path of financial wellness, Shelley says. “Partnering with Momentum allowed us to be able to get involved in this issue.”
“Part of getting people out of debt is to save money and allow you to build your assets and save for important things (and improve quality of life) versus always working on your debt,” Shelley says.
The Cash Crunch Micro Loan creates opportunity to build a credit history, learn how to budget and manage money efficiently, she says.
Momentum provides education on money management. In these sessions, Momentum can find referrals for the Cash Crunch program, which is required under the piloting framework.
“That’s been really helpful because we offer money management workshops. Someone who is learning about budgeting, credit or banking but is saddled with a big loan is going to have a hard time adopting any of the principles (shared),” Carolyn says. “Now, we can say . . . be sure to talk to us after class and then within 24 hours that (payday loan) debt could be gone and replaced by safer debt.
The best thing that’s happening is people get out of debt sooner. We’re able to put money back in their pockets and these hardworking people can provide for their families and themselves. Shelley Vandenberg
“So it really gives us optimism that in addition to the financial capacities we’re offering someone through education, we can resolve a problem that allows people to grow assets and build a different kind of financial platform,” Carolyn says.
A key to Cash Crunch is creating a positive experience for participants entering the credit union’s retail branches. “We really want to create a safe, non-judgmental and non-intimidating loan process that is quick and easy – similar qualities to a payday lender, but make sure they know we’re here to help them and get them into a responsible way of managing their money,” Shelley says.
Cash Crush participants have a chance to build a relationship with a financial institution owned by its members and actively supporting the sustainable community economic development.
Shelley says First Calgary is energized to launch Cash Crunch and see it succeed. “Our employees are passionate about improving the financial well-being of our diverse members and this really resonates with them – that’s often why people come to join a credit union.”
Carolyn notes the Cash Crunch initiative is part of the Enough for All poverty reduction strategy, of which a pillar is doing business differently. “This is an excellent example of working together to do business differently in a way that is less harmful to people who live on low incomes and ideally flips the switch to being beneficial and loving.”
Looking ahead, Carolyn hopes a successful pilot facilitates the micro loan becoming a main commercial product for First Calgary Financial. “And then over time we’d love to see more banks come into the space as well,” she says, noting small consumer loans by big banks have largely vanished.
“We’re trying to bring in a friendly option that really does have the potential to scale up and make a big difference,” she says.
Shelley says she believes all financial institutions have an obligation to get involved in the social cause and revisit how they can help improve their communities and lives of individuals needing short-term assistance.
“We’re happy to lead this initiative in the province of Alberta and show others that you can help and you can still balance the needs of a social cause and the business.”