A loan option for those with bad or not credit
TEXT OF STORY
Tess Vigeland: We reported at the top of the show on how banks are cutting interest rates for their best credit customers. But for most of the population, credit is still hard to come by, especially the millions of immigrants who may not even have a credit history. A five-year-old company here in California is growing fast by offering loans to low-income Latinos. But as Marketplace’s Jennifer Collins reports, these loans come with a hefty price tag.
Jennifer Collins: Alex Arredondo is in line with a couple dozen others on a Tuesday afternoon at Progreso Financiero, a loan office inside a busy supermarket near Los Angeles.
Alex Arredondo: Taking out a second loan, right now, trying to get some extra things paid off, you know, so.
Arredondo’s first loan — for about $700 — helped him cover car payments when his income was low. He paid off that loan in just a few months, long before it was due.
Arredondo: They helped me out a lot and so, you know, I made sure to repay them, you know, by, you know, paying it off as quickly as possible.
Paying it off quickly also saved on interest. Progreso’s typical rates amount to 36 percent a year. That’s more than twice the rate of some credit cards.
Progreso’s founder James Gutierrez says he provides loans to high risk borrowers. Many are new immigrants and don’t have credit histories. Those who do, tend to have low credit ratings or FICO scores.
James Gutierrez: There’s no other access. If you have a 540 FICO score in the U.S. or you don’t have credit, good luck ever being approved by a bank. So where do you go?
Often they go to payday lenders, who charge around 400-percent annual interest and are willing to lend to just about anyone. Progreso isn’t so quick with its money. The company analyzes its clients’ pay stubs, financial info and checks references — all to determine the people most likely to pay back their debts.
Gutierrez: This is like basically a mortgage application for a thousand dollars.
Gutierrez says Progreso doesn’t check for immigration status, which makes it very popular among undocumented immigrants. It also helps borrowers build their credit. After a few loans, people often qualify for better interest rates offered by banks or credit unions. But many continue to borrow money from Progreso.
Janis Bowdler of the National Council of La Raza says that can hurt them.
Janis Bowdler: Your credit score will actually peak and then start to go down. So there is actually a sweet spot for a consumer, where you want to graduate them at the point where their credit score is high, but not keep them on this type of credit forever.
And she says it’s important for borrowers to compare loans in the marketplace before they take out money. San Francisco resident Lorena Quezada says about a year ago, she was barely paying the bills. Her husband was battling cancer, she had a daughter in diapers and her parents had foreclosed on their house.
Lorena Quezada: Everything just piled up and I was like, “Oh my god, what am I going to do?”
A friend suggested Progreso. When Quezada stopped by the office, she says the Progreso staff asked about her family’s finances.
Quezada: The first thing they do is offered me, “Well… Why doesn’t your whole family come and then you can get more money?”
…Around $5,000 all together. Quezada considered it, but opted for just one loan at $1,600. Progreso Financiero has made more than a 100,000 loans in the five years it’s been in business. Jose Quinonez, who runs a nonprofit Peer Lending Circle. He says he’s concerned about the company’s aggressive sales.
Quinonez: For Progreso Financiero, when they’re overly targeting the immigrant community with these loan products, it’s going to increase our indebtedness so that it’s even more impossible to get out of poverty.
Not long after Quezada got the loan from Progreso, she stopped by a credit union to talk to a banker about taking care of her other debts.
Quezada: The rate that he gave me was I think 9 percent interest — with the same credit. And then I felt like a big fool.
Because, as it turns out, even with her poor credit — she could have gotten a better deal if she researched her options first.
I’m Jennifer Collins for Marketplace Money.
Vigeland: For more on poverty and debt go to our Makin’ Money blog. When commentator Webb Brewer was head of legal services in Memphis he saw firsthand the high price of predatory lending.
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