Economically challenged individuals do have some options available to them when it comes to loans and other types of business and personal financial assistance. Two types of entities in the United States that provide financing of different types, and in different ways, to economically disadvantaged individuals are community development financial institutions and payday lenders.
CDFIs did have something of a checkered past three decades ago. In this day and age, there is governmental oversight of their operations and the generally are regarded as proving access to financial services and loans to individuals who might not otherwise be able to obtain this assistance.
Payday lenders remain controversial and under scrutiny today. They are not regulated by a governmental authority in the same manner as a bank or savings and loan. The have been subject to litigation and governmental investigation with considerable regularity in recent years.
There are a number of other differences between CDFIs and payday lenders. It is important to understand these differences if you are seeking some type of financing.
Overview of Community Development Financial Institutions
A CDFI is a financial institution that is designed to provide financial services and credit to underserved segments of the market in the United States. A CDFI comes in a number of forms that include:
- community development bank
- community development credit union
- community development loan fund
- community development venture capital fund
- microenterprise development loan fund
- community development corporation
A CDFI is certified by an entity of the U.S. Treasury Department. The certification authority is the Community Development Financial Institutions Fund. The Community Development Financial Institutions Fund provides funding to individual CDFIs through a variety of different programs.
The Community Development Financial Institutions Fund and the legal underpinnings for CDIFs came into being via the Riegle Community Development and Regulatory Improvement Act of 1994. Although the conceptual legality of CDIFs was recognized in this law, CDIFs were in existence for at least 20 years prior this Act.
The broad purpose behind a CDFI is a primary mission associated with community development. The target market can come in the form of a geographic area or a demographic group of residents in a community. Although certified by an agency of the federal government, a CDFI is not a governmental entity itself.
The Housing and Economic Recovery Act of 2008 authorized certified CDFIs to become members of Federal Home Loan Banks. Each of the 11 Federal Home Loan Banks evaluate applications for membership submitted by individual.
The regulation of CDIFs varies. So-called regulated CDFIs are regulated by the federal government. So-called unregulated CDFIS are in fact regulated by state authorities.
There are approximately 1,000 CDFIs in operation today. CDIFs originated about $3.6 billion in loans and investments in 2016. These loans and investments provided funding for about 13,000 businesses and 33,000 affordable housing units in targeted communities in the United States.
Overview of Payday Lenders
At their essence, payday lenders are companies that lend consumers small amounts of money at high interest rates. The loan is made with the obligation on the part of the borrower to repay the loan, together with accumulated interest, on his or her next payday.
Payday loans are typically in amounts that range from $100 to a maximum of $1,500. The average loan is in the neighborhood of approximately $300 to $400.
Oftentimes, a person who obtains a payday loan does not pay if off o the date if his or her next paycheck. Rather, they roll the loan over for another period, accumulating even more interest.
Laws have been enacted since the Great Recession of 2008 to make payday lenders more transparent. The Truth in Lending Act does require a payday lender to disclose interest rates and other costs associated with a loan. The reality is that many people ignore this information.
Unlike a CDFI, a payday lender has not connection whatsoever to the government. Indeed, a notable number of payday lenders have been targeted by state and federal governmental agencies as a result of their business practices.
Finally, a payday lender makes only short term, low dollar personal loans. A CBFI can make higher dollar business loans in addition to personal ones.
Many individuals and businesses have benefited by accessing the services of a CDFI. A considerable number of consumers have obtained a small amount of quick case from a payday lender. More often than not, in the long run, these consumers paid a considerable amount to get that cash.
Jessica Kane is a professional blogger who focuses on personal finance and other money matters. She currently writes for Checkworks.com, where you can get personal checks and business checks.