The Difference Between Payday Lenders and CDFIs

Loans

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.

 

Summary

 

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.

 

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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.

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Ten Investment Lesson from Warren Buffett

InvestmentsAnyone who follows the business world, finance, and investing has heard of Warren Buffett. He is no doubt of the world’s greatest investment minds of all time. His company, Berkshire Hathaway, has an investing track record that is simply astounding. The compounded returns all the way from 1965 has averaged close to 21%. Buffett has offered a ton of advice during his investment career. I will touch into 10 important lessons anyone can learn from his vast wisdom and experience.

 

The first lesson is one of SIMPLICITY. Buffett says that you should understand the business you are investing in and how it actually makes money. That way, you can see when it is a good investment and when it is not by being able to analyze it better.

 

The second lesson is to START EARLY. Start investing in equities at a young age and with the power of compounding interest, you will be able to get rich over time. You will also be able to recover from market drops with a long-term investing horizon.

 

Next, know that CASH IS KING! Cash flow of companies is very important for their probability. Debt can be a killer. Also, if you have cash on hand to invest, then you are able to pick the best investments and buy when the time is right.

 

Fourth, FUNDAMENTAL ANALYSIS TRUMPS TECHNICAL ANALYSIS: understand the financial statements of a company and its intrinsic value, don’t just think you can look at a stock price chart and think it has all the information you need. Over the long turn, the price of an investment will reflect the fundamentals of a company.

 

From the fourth lesson, comes the fifth: BE CHEAP! Buy companies at reasonable valuations. Over time, companies reflect an average valuation. Buy a good company at a fair or even a cheap price. Don’t overpay for your investments.

 

Sixth, BE SELECTIVE when choosing your investments. Buffett once said that you should look at your stock buying like a punch card with a limited amount of punches you can take. Maybe even just 20 over your investing career.

 

Nest, if you are following lessons five and six, FOCUS ON THE LONG-TERM. There are always going to be short-term fluctuations in equity prices. These reflect emotions, bad news, good news, and whatever is the flavor at the moment. Unless the fundamental nature of the business changes, don’t panic and sell, or be in a rush to buy.

 

Seven, DON’T BE AFRAID TO BE A CONTRARIAN. A contrarian is someone who will go against the market consensus or the current investing environment. This could be selling when there is mania and stock prices are sky high and overpriced and then holding the cash to invest in a great company at a cheap price that may just be struggling for the short-term. Or it could be the brave act of buying when everyone is selling because you are getting once in a lifetime bargain pricing on great companies.

 

Next on the list is to BE UNEMOTIONAL WHEN CHOOSING INVESTMENTS. Don’t buy a stock because it is a popular company, or because everyone is buying it. Don’t sell because of the market downturn. Base your decisions on logic and good financial data.

 

Remember this next lesson: DON’T TRY TO TIME THE MARKET! Buffett says Mr. Market is always right. In the long run, prices will return to average valuations, while over the short-term anything can happen. Tune out all the “noise” and information overload you see from the financial press and focus on your plan to find great companies at fair to cheap prices.

 

Lastly, and number ten on the list is to AVOID PAYING HIGH FEES. Over an investor’s lifetime, fees can take a huge chunk out of your overall returns. Look for companies that charge less and take out less in fees. This is sometimes called the biggest secret in the investment world that the average investor doesn’t pay attention to at all. I would lump TAXES as a part of investment fees. Do things that reduce your tax liability which will, of course, boost your returns over time.

 

Buffett stuck to these principles and many more to get to where he is today, Although they may seem simple enough to follow, many of us will get off track. We can hurt our long-term investing track records by thinking we can always beat the market. Even Buffett has not beaten the market one hundred percent of the time. But he was able to whip the market during bad times by not losing big when times are tough. That’s why he is still around today and one of the greatest investors of all time.

 

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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.