The high cost of payday loans is well known. In fact, the cost is so high that some states have set interest rate caps (usually around 36%) on payday and other cash advance loans. The Center for Responsible Borrowing, which lobbies in favor of consumers against the payday loan industry, recently published a study on the payday loan industry. In that study they cited a Salary Advance Loan Program as a low cost short term loan alternative to payday loans. In this article we will review this program, which is also called a SALO program or StretchPay.
What is the Salary Advance Loan Program
The Salary Advance Loan Program (SALO) was first instituted by the State Employees Credit Union in North Carolina. The program was instituted specifically to break the payday lending cycle. Study after study shows that repeat payday loan borrowers are the most harmed by the high cost of these loans. As a result, the credit union developed the SALO program in an effort to break the costly cycle. Here is how they describe the program:
Brief Description of program: State Employees Credit Union in North Carolina offers an alternative to payday lending. The Salary Advance Loan Program (SALO) fulfills the credit union’s desire to serve members and helps to break the payday lending cycle. The program allows members to take out salary advance loans without having to pay the fees and annual percentage rates between 200% and 900% required at most payday lenders. With the SALO program loans have a maximum ceiling of $500 and a minimum of $50 with an interest rate below 18% and no fees. The loan plus accrued interest must be repaid by an automatic debit from an SECU account on the member’s next pay date. This program is available only to those members whose paycheck is already on direct deposit with SECU. The application and underwriting requirements are minimized to make these loans convenient and accessible. Advances are available up to the credit ceiling and may be called in by phone. Basically, all anyone needs to get the loan is to be a member with a checking account, use direct deposit and not be in bankruptcy.
Help with savings
The salary advance loan program also has a savings component. Five percent of the amount borrowed is placed into a SALO Cash Account that earnings interest at the prevailing rate. This 5% savings acts as a pledge against the advance and helps to teach consumers about the importance of savings. Here’s the description of the program:
In addition SECU has implemented a cash account aimed at breaking the payday loan cycle altogether and helping the member build personal savings. The SALO Cash Account is a pledge against the salary advance loan. Each time a SALO loan is granted 5% of the advance is deposited into the SALO Cash Account and accumulates interest at the prevailing passbook rate. The cash is used to partially securitize the loan and encourages the member to save. If the member receives numerous advances the savings account grows by 5% of each loan advance and increases the amount of security pledged against the loan.
As part of the SALO loan and cash account programs the credit union has also implemented a way for the members to obtain financial education. The credit union has partnered with BALANCE, a consumer credit counseling service that is available free to members. The service can help with debt restructuring, budgeting and education so members can better understand their finances. The credit union usually recommends the member works with BALANCE after receiving three consecutive payday loans.
Other credit unions offer similar programs
Other credit unions have followed suit and are offering similar programs. Here are a few examples:
Wright-Patt Credit Union: StretchPay
Day Air Credit Union: StretchPay
First Freedom Credit Union: Payday Alternative Loan (PAL)