Increase financial security by breaking the cycle of debt faced by low-income households
Lesson Learned:
Philanthropic capital can be key to providing low/no-interest loans that keep families afloat.
Each year, more than 12 million Americans report taking out payday loans to meet recurring household expenses such as rent and utilities.[1] Such loans offer quick approval and payouts for those with little to no credit. However, they demand high interest rates and short repayment periods.[2] Since 80% of payday loans are taken out within two weeks of a previous repayment, borrowers remain in a chronic cycle of debt.[3]
Operating in ten states in the U.S., Capital Good Fund enables those with poor or no credit to build credit while receiving loans needed to cover recurring household expenses.
“Without Capital Good Fund, I would have been back on the downward spiral, all for the sake of a thousand dollars. I am frugal, but I couldn’t make ends meet. My experience with Capital Good Fund was outstanding and very different from anything I had experienced. It’s a true opportunity to recover without taking any steps backward.”
— Margaret, crisis relief loan recipient
What it does
For low- and moderate-income households with no or poor credit, Capital Good Fund helps families break the cycle of debt through two services: 1) low-interest loans, and 2) credit-building coaching programs.
- Low-interest loans: Capital Good Fund loans cost a borrower just 4% of the cost of an average payday loan. For example, the average $400 payday loan must be repaid in 14 days with a 391% annual interest rate for a cost of $1,200 to the borrower. In contrast, Capital Good Fund allows the borrower to repay the loan over 15 months with an annual interest rate of 12% for a cost of $433 for the same $400 loan.
- Credit-building coaching programs: In addition to loans, Capital Good Fund
also offers credit-building financial coaching programs, which have reached 1,800 households so far. As an example, its Financial Coaching Plus program establishes a year-long relationship between a participating client and a trained financial coach who work together to create a personalized plan to get out of debt, save for college, learn to manage money effectively, or achieve another goal. To build their credit, participants make 12 monthly payments of $15 each, which is reported to all three credit bureaus as a 0% interest loan.
How effective it is
While the nonprofit’s overall loan repayment rate is 97%, the organization raises grant dollars to forgive up to 30% of loans — enabling them to take on riskier borrowers who are in urgent need of funds. Capital Good Fund estimates that its emergency loans for car repairs, medical bills, or other urgent needs save clients $500 in interest and fees versus predatory alternatives. Loans to cover immigration expenses and car purchases save $3,000 and $4,000, respectively.
In a randomized controlled trial study, Capital Good Fund found that their financial coaching program improved participants’ use of a bank account and budget; reduced food insecurity; reduced use of predatory loans; and allowed participants to afford medications or routine doctor’s visits. Participants in Capital Good Fund’s financial coaching programs improved their credit scores by 90 points.
How philanthropy helps
Capital Good Fund covers 70% of its operations with philanthropic funding, with the rest from interest income, shared services, and program revenue. Philanthropic support allows the organization to keep its interest rates low, forgive debt, and fund expansion.
More ways to help
Compass Working Capital provides financial coaching and savings programs for those living in federally subsidized housing. Benefits Data Trust (BDT) connects people to financial benefits and services (e.g., SNAP benefits, Medicaid) in six states. HOPE provides financial services, economic development programs, and policy advocacy to increase the financial empowerment of underserved communities in the Deep South.
Notes
[1] Pew Charitable Trusts. (2016, January 14). Payday Loan Facts and the CFPB’s Impact. The Pew Charitable Trusts. http://pew.org/202ouGX
[2] Horowitz, A. (2023, June 7). What Does the Research Say About Payday Loans? Pew Charitable Trusts. https://pew.org/3qxDh4x
[3] Pew Charitable Trusts. (2016, January 14). Payday Loan Facts and the CFPB’s Impact. The Pew Charitable Trusts. http://pew.org/202ouGX